20-F 1 d368256d20f.htm 20-F 20-F
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 20-F

 

 

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

OR

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report

Commission file number: 1-10110

 

 

BANCO BILBAO VIZCAYA ARGENTARIA, S.A.

(Exact name of Registrant as specified in its charter)

BANK BILBAO VIZCAYA ARGENTARIA, S.A.

(Translation of Registrant’s name into English)

 

 

Kingdom of Spain

(Jurisdiction of incorporation or organization)

Calle Azul, 4

28050 Madrid

Spain

(Address of principal executive offices)

Ricardo Gómez Barredo

Calle Azul, 4

28050 Madrid

Spain

Telephone number +34 91 537 7000

Fax number +34 91 537 6766

(Name, Telephone, E-mail and /or Facsimile Number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of Each Class

 

Name of Each Exchange on which Registered

American Depositary Shares, each representing

the right to receive one ordinary share,

par value €0.49 per share

  New York Stock Exchange
Ordinary shares, par value €0.49 per share   New York Stock Exchange*

Guarantee of Non-Cumulative Guaranteed

Preferred Securities, Series C, liquidation preference $1,000 each, of BBVA International Preferred, S.A. Unipersonal

  New York Stock Exchange**
3.000% Fixed Rate Senior Notes due 2020   New York Stock Exchange

 

* The ordinary shares are not listed for trading, but are listed only in connection with the registration of the American Depositary Shares, pursuant to requirements of the New York Stock Exchange.
** The guarantee is not listed for trading, but is listed only in connection with the registration of the corresponding Non-Cumulative Guaranteed Preferred Securities of BBVA International Preferred, S.A. Unipersonal (a wholly-owned subsidiary of Banco Bilbao Vizcaya Argentaria, S.A.).

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

The number of outstanding shares of each class of stock of the Registrant as of December 31, 2016, was:

Ordinary shares, par value €0.49 per share—6,566,615,242

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  ☒    No  ☐

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes  ☐    No  ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  ☐    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):

 

Large accelerated filer  ☒    Accelerated filer  ☐   Non-accelerated filer  ☐

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  ☐  

International Financial Reporting Standards as Issued

by the International Accounting Standards Board  ☒

   Other  ☐

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17  ☐    Item 18  ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ☐    No  ☒

 

 

 


Table of Contents

BANCO BILBAO VIZCAYA ARGENTARIA, S.A.

TABLE OF CONTENTS

 

          PAGE  

PART I

     

ITEM 1.

  

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

     7  

A.

  

Directors and Senior Management

     7  

B.

  

Advisers

     7  

C.

  

Auditors

     7  

ITEM 2.

  

OFFER STATISTICS AND EXPECTED TIMETABLE

     7  

ITEM 3.

  

KEY INFORMATION

     8  

A.

  

Selected Consolidated Financial Data

     8  

B.

  

Capitalization and Indebtedness

     11  

C.

  

Reasons for the Offer and Use of Proceeds

     11  

D.

  

Risk Factors

     11  

ITEM 4.

  

INFORMATION ON THE COMPANY

     33  

A.

  

History and Development of the Company

     33  

B.

  

Business Overview

     36  

C.

  

Organizational Structure

     65  

D.

  

Property, Plants and Equipment

     65  

E.

  

Selected Statistical Information

     66  

F.

  

Competition

     87  

G.

  

Cybersecurity and Fraud Management

     90  

ITEM 4A.

  

UNRESOLVED STAFF COMMENTS

     90  

ITEM 5.

  

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

     90  

A.

  

Operating Results

     96  

B.

  

Liquidity and Capital Resources

     146  

C.

  

Research and Development, Patents and Licenses, etc.

     151  

D.

  

Trend Information

     151  

E.

  

Off-Balance Sheet Arrangements

     154  

F.

  

Tabular Disclosure of Contractual Obligations

     155  

ITEM 6.

  

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

     155  

A.

  

Directors and Senior Management

     155  

B.

  

Compensation

     163  

C.

  

Board Practices

     172  

D.

  

Employees

     180  

E.

  

Share Ownership

     183  

ITEM 7.

  

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

     184  

A.

  

Major Shareholders

     184  

B.

  

Related Party Transactions

     184  

C.

  

Interests of Experts and Counsel

     186  

ITEM 8.

  

FINANCIAL INFORMATION

     186  

A.

  

Consolidated Statements and Other Financial Information

     186  

B.

  

Significant Changes

     188  

ITEM 9.

  

THE OFFER AND LISTING

     188  

A.

  

Offer and Listing Details

     188  

B.

  

Plan of Distribution

     195  

C.

  

Markets

     195  

D.

  

Selling Shareholders

     196  

E.

  

Dilution

     196  

F.

  

Expenses of the Issue

     196  

ITEM 10.

  

ADDITIONAL INFORMATION

     196  

A.

  

Share Capital

     196  

 


Table of Contents
          PAGE  

B.

  

Memorandum and Articles of Association

     196  

C.

  

Material Contracts

     199  

D.

  

Exchange Controls

     199  

E.

  

Taxation

     200  

F.

  

Dividends and Paying Agents

     206  

G.

  

Statement by Experts

     206  

H.

  

Documents on Display

     207  

I.

  

Subsidiary Information

     207  

ITEM 11.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     208  

ITEM 12.

  

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

     216  

A.

  

Debt Securities

     216  

B.

  

Warrants and Rights

     216  

C.

  

Other Securities

     216  

D.

  

American Depositary Shares

     216  

PART II

     

ITEM 13.

  

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

     218  

ITEM 14.

  

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

     218  

ITEM 15.

  

CONTROLS AND PROCEDURES

     218  

ITEM 16.

  

[RESERVED]

     220  

ITEM 16A.

  

AUDIT COMMITTEE FINANCIAL EXPERT

     220  

ITEM 16B.

  

CODE OF ETHICS

     220  

ITEM 16C.

  

PRINCIPAL ACCOUNTANT FEES AND SERVICES

     221  

ITEM 16D.

  

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

     222  

ITEM 16E.

  

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

     222  

ITEM 16F.

  

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

     222  

ITEM 16G.

  

CORPORATE GOVERNANCE

     223  

ITEM 16H.

  

MINE SAFETY DISCLOSURE

     225  

PART III

     

ITEM 17.

  

FINANCIAL STATEMENTS

     225  

ITEM 18.

  

FINANCIAL STATEMENTS

     225  

ITEM 19.

  

EXHIBITS

     225  

 

 

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CERTAIN TERMS AND CONVENTIONS

The terms below are used as follows throughout this report:

 

    BBVA”, the “Bank”, the “Company”, the “Group” or the “BBVA Group” means Banco Bilbao Vizcaya Argentaria, S.A. and its consolidated subsidiaries unless otherwise indicated or the context otherwise requires.

 

    BBVA Bancomer” means Grupo Financiero BBVA Bancomer, S.A. de C.V. and its consolidated subsidiaries, unless otherwise indicated or the context otherwise requires.

 

    BBVA Compass” means BBVA Compass Bancshares, Inc. and its consolidated subsidiaries, unless otherwise indicated or the context otherwise requires.

 

    Consolidated Financial Statements” means our audited consolidated financial statements as of and for the years ended December 31, 2016, 2015 and 2014 prepared in accordance with the International Financial Reporting Standards adopted by the European Union (“EU-IFRS”) required to be applied under the Bank of Spain’s Circular 4/2004 and in compliance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS-IASB”).

 

    Latin America” refers to Mexico and the countries in which we operate in South America and Central America.

First person personal pronouns used in this report, such as “we”, “us”, or “our”, mean BBVA, unless otherwise indicated or the context otherwise requires.

In this report, “$”, “U.S. dollars”, and “dollars” refer to United States Dollars and “€” and “euro” refer to Euro.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report contains statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include words such as “believe”, “expect”, “estimate”, “project”, “anticipate”, “should”, “intend”, “probability”, “risk”, “VaR”, “target”, “goal”, “objective” and similar expressions or variations on such expressions and includes statements regarding future growth rates. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those in the forward-looking statements as a result of various factors. The accompanying information in this Annual Report, including, without limitation, the information under the items listed below, identifies important factors that could cause such differences:

 

    “Item 3. Key Information—Risk Factors”;

 

    “Item 4. Information on the Company”;

 

    “Item 5. Operating and Financial Review and Prospects”; and

 

    “Item 11. Quantitative and Qualitative Disclosures About Market Risk”.

Other important factors that could cause actual results to differ materially from those in forward-looking statements include, among others:

 

    general political, economic and business conditions in Spain, the European Union (“EU”), Latin America, Turkey, the United States and other regions, countries or territories in which we operate;

 

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    changes in applicable laws and regulations, including increased capital and provision requirements and taxation, and steps taken towards achieving an EU fiscal and banking union;

 

    the monetary, interest rate and other policies of central banks in the EU, Spain, the United States, Mexico, Turkey and elsewhere;

 

    changes or volatility in interest rates, foreign exchange rates (including the euro to U.S. dollar exchange rate), asset prices, equity markets, commodity prices, inflation or deflation;

 

    ongoing market adjustments in the real estate sectors in Spain, Mexico and the United States;

 

    the effects of competition in the markets in which we operate, which may be influenced by regulation or deregulation;

 

    changes in consumer spending and savings habits, including changes in government policies which may influence spending, saving and investment decisions;

 

    adverse developments in emerging countries, in particular Latin America and Turkey, including unfavorable political and economic developments, social instability and changes in governmental policies, including expropriation, nationalization, international ownership legislation, interest rate caps and tax policies;

 

    our ability to hedge certain risks economically;

 

    downgrades in our credit ratings or in the Kingdom of Spain’s credit ratings;

 

    the success of our acquisitions, divestitures, mergers and strategic alliances;

 

    our ability to make payments on certain substantial unfunded amounts relating to commitments with personnel;

 

    the performance of our international operations and our ability to manage such operations;

 

    weaknesses or failures in our Group’s internal processes, systems (including information technology systems) and security;

 

    our success in managing the risks involved in the foregoing, which depends, among other things, on our ability to anticipate events that are not captured by the statistical models we use; and

 

    force majeure and other events beyond our control.

Readers are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date hereof. We undertake no obligation to release publicly the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof, including, without limitation, changes in our business or acquisition strategy or planned capital expenditures, or to reflect the occurrence of unanticipated events.

 

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PRESENTATION OF FINANCIAL INFORMATION

Accounting Principles

Under Regulation (EC) no. 1606/2002 of the European Parliament and of the Council of July 19, 2002, all companies governed by the law of an EU Member State and whose securities are admitted to trading on a regulated market of any Member State must prepare their consolidated financial statements for the years beginning on or after January 1, 2005 in conformity with EU-IFRS. The Bank of Spain issued Circular 4/2004 of December 22, 2004 on Public and Confidential Financial Reporting Rules and Formats (as amended or supplemented from time to time, “Circular 4/2004”), which requires Spanish credit institutions to adapt their accounting system to the principles derived from the adoption by the European Union of EU-IFRS.

Differences between EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004 and IFRS-IASB are not material for the years ended December 31, 2016, 2015 and 2014. Accordingly, the Consolidated Financial Statements included in this Annual Report have been prepared in accordance with EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004 and in compliance with IFRS-IASB.

The financial information as of and for the years ended December 31, 2014, 2013 and 2012 may differ from previously reported financial information as of such dates and for such periods in our respective annual reports on Form 20-F for certain prior years, as a result mainly of the retrospective revisions referred to below (see “—Retrospective Revisions”). In addition, the financial information as of and for the year ended December 31, 2012 may differ from previously reported financial information as of such date and for such period in our annual report on Form 20-F for such year, as a result of the implementation of changes in the accounting standards set out in IFRS 10 and 11 that came into force in 2013.

Retrospective Revisions

New presentation models required by Circular 5/2015 of the CNMV

Our consolidated financial statements for the year ended December 31, 2016 have been prepared in accordance with the presentation models required by Circular 5/2015 of the National Securities Market Commission or “CNMV” (Comisión Nacional del Mercado de Valores). This Circular seeks to adapt the content of the financial information published by credit institutions and the format in which financial statements are presented to the mandatory regulation adopted by the European Union for credit institutions.

The information relating to the years ended December 31, 2015 and 2014 has been restated in accordance with the new presentation models referred to above. The presentation of our consolidated financial statements in accordance with these new models has had no significant impact on the financial statements included in the Consolidated Financial Statements for the years ended December 31, 2015 and 2014.

Reclassifications of certain operating expenses

In the fourth quarter of 2015, we reclassified several operating expenses related to technology from our Corporate Center to our Banking Activity in Spain segment. This reclassification was the result of the reassignment of technology-related management resources and responsibilities from the Corporate Center to the Banking Activity in Spain segment during 2015.

In our Consolidated Financial Statements and throughout this Annual Report, the comparative financial information by operating segment for 2014 has been retrospectively revised to reflect the reclassification of these expenses. This reclassification of expenses did not affect the Group’s consolidated income statements.

Changes in operating segments

On July 27, 2015, we acquired 62,538,000,000 shares (in the aggregate) of the Turkish bank Türkiye Garanti Bankası A.Ş. (“Garanti”) from Doğuş Holding A.Ş., Ferit Faik Şahenk, Dianne Şahenk and Defne Şahenk, under certain agreements entered into on November 19, 2014. Following this acquisition, we held 39.90% of Garanti’s

 

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share capital and started to fully consolidate Garanti’s results in our consolidated financial statements as we determined we were able to control such entity in accordance with our shareholders’ agreement with the Doğuş group. See “Item 4. Information on the Company—Material Contracts—Shareholders’ Agreement in Connection with Garanti.” On March 22, 2017, we completed the acquisition of an additional 9.95% stake in Garanti. See “Item 4. Information on the Company—History and Development of the Company—Capital expenditures—2017.”

The acquisition completed in 2015 resulted in certain changes in our operating segments. In particular, since January 1, 2015, our former Eurasia segment has been recast into the following two segments: Turkey, which consists of our stake in Garanti (25.01% until July 27, 2015, 39.90% from July 27, 2015 to March 22, 2017 and 49.85% since March 22, 2017), and Rest of Eurasia, which includes the retail and wholesale businesses carried out in Europe and Asia, other than in Spain and Turkey.

In our Consolidated Financial Statements and throughout this Annual Report, the comparative financial information by operating segment for 2014 has been retrospectively revised to reflect our current reporting structure. This revision did not affect the Group’s consolidated income statements.

There have been no significant changes to our operating segments during 2016 (see Note 6 to the Consolidated Financial Statements).

Business combinations

Certain financial information for the year ended December 31, 2015 has been restated, with no significant impact, as a result of the end in 2016 of the purchase accounting period relating to the stake in Garanti acquired in 2015, as required by IFRS 3 “Business Combinations” (see Note 18 to the Consolidated Financial Statements ).

Statistical and Financial Information

The following principles should be noted in reviewing the statistical and financial information contained herein:

 

    Average balances, when used, are based on the beginning and the month-end balances during each year. We do not believe that such monthly averages present trends that are materially different from those that would be presented by daily averages.

 

    Unless otherwise stated, any reference to loans refers to both loans and advances.

 

    Financial information with respect to segments or subsidiaries may not reflect consolidation adjustments.

 

    Certain numerical information in this Annual Report may not compute due to rounding. In addition, information regarding period-to-period changes is based on numbers which have not been rounded.

Venezuela

The local financial statements of the Group subsidiaries in Venezuela are expressed in Venezuelan bolivar and they are converted into euros for purposes of preparing the Group’s consolidated financial statements. Venezuela has strict foreign exchange restrictions and different exchange rates in place.

In past years, we have used different exchange rates to prepare the Group’s consolidated financial statements:

 

    Until January 1, 2014, we used the CADIVI exchange rate (named after the acronym, in Spanish, of the Foreign Exchange Administration Commission, currently the National Center for Foreign Trade or CENCOEX). As of December 31, 2013 the exchange rate was 8.68 Venezuelan bolivars per euro.

 

   

In 2014 the Venezuelan government approved a new exchange rate system referred to as the “foreign-currency system”, in which the exchange rate against the U.S. dollar was determined in an auction which was open to both individuals and companies, resulting in an exchange rate that fluctuated from auction to auction

 

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and was published on the website of the Complementary Currency Administration System (SICAD I). Subsequently, in July 2014, the Venezuelan government established a new type of auction called SICAD II only applicable to certain types of transactions and not applicable to credit institutions. As of December 31, 2014 the applicable exchange rate (SICAD I) was 14.71 Venezuelan bolivars per euro. For purposes of preparing our consolidated financial statements as of and for the year ended December 31, 2014 we used the SICAD I exchange rate.

 

    On February 10, 2015, the Venezuelan government announced the cancellation of SICAD II and its combination with SICAD I in order to create a new SICAD and the creation of a new foreign-currency system called SIMADI. The Group used the SIMADI exchange rate starting in March 2015 for purpose of the Group’s interim financial statements. The SIMADI exchange rate increased rapidly to approximately 218 Venezuelan bolivars per euro and stabilized during the second half of 2015 to 216.3 Venezuelan bolivars per euro as of December 31, 2015. However, as explained below, we have not used this exchange rate to prepare the Group’s Consolidated Financial Statements.

 

    In February 2016, the Venezuelan government approved a new exchange rate agreement which sets two new mechanisms (DICOM and SICOM) that regulate the purchase and sale of foreign currency and the suspension of the SIMADI exchange rate.

 

    The Bank’s Board of Directors determined that the use of the new DICOM and SICOM exchange rates and, previously, the SIMADI exchange rate, for converting bolivars into euros in preparing the consolidated financial statements, as of and for the years ended December 31, 2015 and 2016, would not provide an accurate picture of the consolidated financial statements of the Group or the financial position of the Group subsidiaries in Venezuela.

 

    Consequently, as of December 31, 2015 and 2016, the Group has used alternative conversion exchange rates in the conversion of the financial statements of the Group’s subsidiaries in Venezuela of 469 and 1,893 Venezuelan bolivars per euro, respectively. These exchanges rates have been calculated by BBVA Research taking into account the estimated evolution of inflation in Venezuela in 2015 and 2016 (170% and 300%, respectively) (see Note 2.2.20 to the Consolidated Financial Statements).

PART I

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

A. Director and Senior Management

Not Applicable.

B. Advisers

Not Applicable.

C. Auditors

Not Applicable.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable.

 

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ITEM 3. KEY INFORMATION

A. Selected Consolidated Financial Data

The historical financial information set forth below for the years ended December 31, 2016, 2015 and 2014 has been selected from, and should be read together with, the Consolidated Financial Statements included herein. The audited consolidated financial statements for 2013 and 2012 are not included in this document, and they instead are derived from the respective annual reports on Form 20-F for certain prior years previously filed by us with retrospective adjustments made for the application of certain changes in accounting principles.

For information concerning the preparation and presentation of the financial information contained herein, see “Presentation of Financial Information”.

 

     Year Ended December 31,  
     2016     2015     2014     2013 (1)     2012 (1)  
     (In Millions of Euros, Except Per Share/ADS Data (In Euros))  

Consolidated Statement of Income Data

          

Interest and similar income

     27,708       24,783       22,838       23,512       24,815  

Interest and similar expenses

     (10,648     (8,761     (8,456     (9,612     (10,341

Net interest income

     17,059       16,022       14,382       13,900       14,474  

Dividend income

     467       415       531       235       390  

Share of profit or loss of entities accounted for using the equity method

     25       174       343       694       1,039  

Fee and commission income

     6,804       6,340       5,530       5,478       5,290  

Fee and commission expenses

     (2,086     (1,729     (1,356     (1,228     (1,134

Net gains(losses) on financial assets and liabilities

     1,661       865       1,435       1,608       1,636  

Exchange differences (net)

     472       1,165       699       903       69  

Other operating income

     1,272       1,315       959       1,234       1,108  

Other operating expenses

     (2,128     (2,285     (2,705     (3,002     (2,045

Income on insurance and reinsurance contracts

     3,652       3,678       3,622       3,761       3,657  

Expenses on insurance and reinsurance contracts

     (2,545     (2,599     (2,714     (2,831     (2,660

Gross income

     24,653       23,362       20,725       20,752       21,824  

Administration costs

     (11,366     (10,836     (9,414     (9,701     (9,396

Depreciation

     (1,426     (1,272     (1,145     (1,095     (978

Provisions or (-) reversal of provisions

     (1,186     (731     (1,142     (609     (641

Impairment losses on financial assets (net)

     (3,801     (4,272     (4,340     (5,612     (7,859

Net operating income

     6,874       6,251       4,684       3,735       2,950  

Impairment losses on other assets (net)

     (521     (273     (297     (467     (1,123

Gains (losses) on derecognition of non-financial assets and subsidiaries, net

     70       (2,135     46       (1,915     3  

Negative goodwill recognized in profit or loss

     —         26       —         —         376  

Profit or (-) loss from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations

     (31     734       (453     (399     (624

Operating profit before tax

     6,392       4,603       3,980       954       1,582  

Tax expense or (-) income related to profit or loss from continuing operations

     (1,699     (1,274     (898     16       352  

Profit from continuing operations

     4,693       3,328       3,082       970       1,934  

Profit from discontinued operations (net) (2)

     —         —         —         1,866       393  

Profit

     4,693       3,328       3,082       2,836       2,327  

Profit attributable to parent company

     3,475       2,642       2,618       2,084       1,676  

Profit attributable to non-controlling interests

     1,218       686       464       753       651  

Per share/ADS(3) Data

          

Profit from continuing operations

     0.71       0.52       0.50       0.17       0.35  

Diluted profit attributable to parent company (4)

     0.50       0.37       0.40       0.33       0.30  

Basic profit attributable to parent company

     0.50       0.37       0.40       0.33       0.30  

Dividends declared (In Euros)

     0.160       0.160       0.080       0.100       0.200  

Dividends declared (In U.S. dollars)

     0.169       0.174       0.097       0.138       0.264  

Number of shares outstanding (at period end)

     6,566,615,242       6,366,680,118       6,171,338,995       5,785,954,443       5,448,849,545  

 

(1) Restated for comparative purposes as a result of the application at December 31, 2014 of IFRIC 21 (Levies).

 

 

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(2) For 2013 and 2012, includes the capital gains from the sale of Afore Bancomer in Mexico and the South America pension fund administrators, as well as the earnings recorded by these companies up to the date of these sales.
(3)  Each American Depositary Share (“ADS”) represents the right to receive one ordinary share.
(4)  Calculated on the basis of the weighted average number of BBVA’s ordinary shares outstanding during the relevant period including the average number of estimated shares to be converted and, for comparative purposes, a correction factor to account for the capital increases carried out in April 2012, October 2012, April 2013, October 2013, April 2014, October 2014, December 2014, April 2015, October 2015, December 2015, April 2016 and October 2016, excluding the weighted average number of treasury shares during the period (6,468 million, 6,290 million, 5,905 million, 5,597 million and 5,829 million shares in 2016, 2015, 2014, 2013 and 2012, respectively). With respect to the years ended December 31, 2016, 2015 and 2014, see Note 5 to the Consolidated Financial Statements.

 

     As of and for Year Ended December 31,  
     2016     2015     2014     2013 (1)     2012 (1)  
     (In Millions of Euros, Except Percentages)  

Consolidated Balance Sheet Data

          

Total assets

     731,856       749,855       631,942       582,697       621,132  

Net assets

     55,428       55,282       51,609       44,565       43,802  

Common stock

     3,218       3,120       3,024       2,835       2,670  

Loans and receivables (net)

     465,977       471,828       376,086       350,945       371,347  

Customer deposits

     401,465       403,362       319,334       300,490       282,795  

Debt certificates and subordinated liabilities

     76,375       81,980       71,917       74,676       98,070  

Non-controlling interest

     8,064       7,992       2,511       2,371       2,372  

Total equity

     55,428       55,282       51,609       44,565       43, 802  

Consolidated ratios

          

Profitability ratios:

          

Net interest margin(2)

     2.32     2.27     2.40     2.32     2.38

Return on average total assets(3)

     0.6     0.5     0.5     0.5     0.4

Return on average total stockholders’ funds (4)

     6.7     5.3     5.6     5.0     4.1

Credit quality data

          

Loan loss reserve (5)

     16,016       18,742       14,273       14,990       14,144  

Loan loss reserve as a percentage of total loans and receivables (net)

     3.44     3.97     3.83     4.27     3.81

Non-performing asset ratio (NPA ratio) (6)

     4.90     5.39     5.98     6.95     5.06

Impaired loans and advances to customers

     22,915       25,333       22,703       25,445       19,960  

Impaired contingent liabilities to customers (7)

     680       664       413       410       312  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     23,595       25,997       23,116       25,855       20,272  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and advances to customers

     430,629       432,921       353,029       338,664       356,521  

Contingent liabilities to customers

     50,540       49,876       33,741       33,543       36,891  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     481,169       482,797       386,770       372,207       393,412  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Information has been restated for comparative purposes as a result of the application at December 31, 2014 of IFRIC 21 (Levies).
(2) Represents net interest income as a percentage of average total assets.
(3)  Represents profit as a percentage of average total assets.

 

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(4)  Represents profit attributable to parent company for the year as a percentage of average stockholders’ funds for the year, excluding “Non-controlling interest”.
(5)  Represents impairment losses on loans and receivables to credit institutions, loans and advances to customers and debt securities. See Note 13 to the Consolidated Financial Statements.
(6)  Represents the sum of impaired loans and advances to customers and impaired contingent liabilities to customers divided by the sum of loans and advances to customers and contingent liabilities to customers.
(7)  We include contingent liabilities in the calculation of our non-performing asset ratio (NPA ratio). We believe that impaired contingent liabilities should be included in the calculation of our NPA ratio where we have reason to know, as of the reporting date, that they are impaired. The credit risk associated with contingent liabilities (consisting mainly of financial guarantees provided to third-parties on behalf of our customers) is evaluated and provisioned according to the probability of default of our customers’ obligations. If impaired contingent liabilities were not included in the calculation of our NPA ratio, such ratio would generally be higher for the periods covered, amounting to approximately 5.3%,5.9%, 6.4%, 7.5% and 5.6% as of December 31, 2016, 2015, 2014, 2013 and 2012, respectively.

Exchange Rates

Spain’s currency is the euro. Unless otherwise indicated, the amounts that have been converted to euro in this Annual Report have been done so at the corresponding exchange rate published by the European Central Bank (“ECB”) on December 31 of the relevant period.

For convenience in the analysis of the information, the following tables describe, for the periods and dates indicated, information concerning the noon buying rate for euro, expressed in dollars per €1.00. The term “noon buying rate” refers to the rate of exchange for euros, expressed in U.S. dollars per euro, in the City of New York for cable transfers payable in foreign currencies as certified by the Federal Reserve Bank of New York for customs purposes.

 

Year ended December 31,

   Average(1)  

2012

     1.2908  

2013

     1.3303  

2014

     1.3210  

2015

     1.1032  

2016

     1.1029  

2017 (through March 24, 2017)

     1.0650  

 

(1)  Calculated by using the average of the exchange rates on the last day of each month during the period.

 

Month ended

   High      Low  

September 30, 2016

     1.1271        1.1158  

October 31, 2016

     1.1212        1.0866  

November 30, 2016

     1.1121        1.0560  

December 31, 2016

     1.0758        1.0375  

January 31, 2017

     1.0794        1.0416  

February 28, 2017

     1.0802        1.0551  

March 31, 2017 (through March 24, 2017)

     1.0810        1.0514  

The noon buying rate for euro from the Federal Reserve Bank of New York, expressed in dollars per €1.00, on March 24, 2017, was $1.0806.

As of December 31, 2016, approximately 47% of our assets and approximately 46% of our liabilities were denominated in currencies other than euro. See Note 2.2.16 to our Consolidated Financial Statements.

 

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For a discussion of our foreign currency exposure, please see Note 7.4.2 to our Consolidated Financial Statements (“Market Risk—Structural Exchange Rate Risk”) and “Item 11. Quantitative and Qualitative Disclosures About Market Risk”.

B. Capitalization and Indebtedness

Not Applicable.

C. Reasons for the Offer and Use of Proceeds

Not Applicable.

D. Risk Factors

Macroeconomic Risks

Economic conditions in the countries where the Group operates could have a material adverse effect on the Group’s business, financial condition and results of operations

Despite the recent growth of the global economy, uncertainty remains. The deterioration of economic conditions in the countries where the Group operates could adversely affect the cost and availability of funding for the Group, the quality of the Group’s loan and investment securities portfolios and levels of deposits and profitability, which may also require the Group to take impairments on its exposures to the sovereign debt of one or more countries or otherwise adversely affect the Group’s business, financial condition and results of operations. In addition, the process the Group uses to estimate losses inherent in its credit exposure requires complex judgments, including forecasts of economic conditions and how these economic conditions might impair the ability of its borrowers to repay their loans. The degree of uncertainty concerning economic conditions may adversely affect the accuracy of the Group’s estimates, which may, in turn, affect the reliability of the process and the sufficiency of the Group’s loan loss provisions.

The Group faces, among others, the following economic risks:

 

    weak economic growth or recession in the countries where it operates;

 

    changes in the institutional environment in the countries where it operates could evolve into sudden and intense economic and/or regulatory downturns;

 

    deflation, mainly in Europe, or significant inflation, such as the significant inflation recently experienced by Venezuela and Argentina;

 

    changes in foreign exchange rates, such as the recent local currency devaluations in Venezuela and Argentina, as they result in changes in the reported earnings of the Group’s subsidiaries outside the Eurozone, and their assets, including their risk-weighted assets, and liabilities;

 

    a lower interest rate environment, even a prolonged period of negative interest rates in some areas where the Bank operates, which could lead to decreased lending margins and lower returns on assets;

 

    a higher interest rate environment, including as a result of an increase in interest rates by the Federal Reserve or any further tightening of monetary policies, including to address inflationary pressures and currency devaluations in Latin America, which could endanger a still tepid and fragile economic recovery and make it more difficult for customers of the Group’s mortgage and consumer loan products to service their debts;

 

    adverse developments in the real estate market, especially in Spain, Mexico, the United States and Turkey, given the Group’s exposures to such markets;

 

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    poor employment growth and structural challenges restricting employment growth, such as in Spain, where unemployment has remained relatively high, which may negatively affect the household income levels of the Group’s retail customers and may adversely affect the recoverability of the Group’s retail loans, resulting in increased loan loss provisions;

 

    lower oil prices, which could particularly affect producing areas, such as Venezuela, Mexico, Texas or Colombia, to which the Group is materially exposed;

 

    changes in laws, regulations and policies as a result of election processes in the different geographies in which the Group operates, including Spain, the Spanish region of Catalonia and the United States, which may negatively affect the Group’s business or customers in those geographies and other geographies in which the Group operates;

 

    the potential exit by an EU Member State from the European Monetary Union (“EMU”), which could materially adversely affect the European and global economy, cause a redenomination of financial instruments or other contractual obligations from the euro to a different currency and substantially disrupt capital, interbank, banking and other markets, among other effects;

 

    the possible political, economic and regulatory impacts in the United Kingdom and the European Union (“EU”) derived from the outcome of the referendum held in the United Kingdom on June 23, 2016, which resulted in a vote in favor of the United Kingdom leaving the EU. The possible impact of the United Kingdom exiting the EU could include, among other things, political instability in the United Kingdom, the EU as a whole, or countries forming part of the EU; regulatory changes in the United Kingdom and/or in the EU; economic slowdown in the United Kingdom, in the EU and/or outside the EU; deterioration of the creditworthiness of borrowers based in or related to the United Kingdom; and volatility in financial markets which could limit or condition BBVA’s or any other issuer’s access to capital markets, all of which may arise regardless of the uncertainty as to the timing and duration of the exit process; and

 

    an eventual government default on public debt, which could affect the Group primarily in two ways: directly, through portfolio losses, and indirectly, through instabilities that a default in public debt could cause to the banking system as a whole, particularly since commercial banks’ exposure to government debt is generally high in several countries in which the Group operates.

For additional information relating to certain economic risks that the Group faces in Spain, see “ Since the Group’s loan portfolio is highly concentrated in Spain, adverse changes affecting the Spanish economy could have a material adverse effect on its financial condition.” For additional information relating to certain economic risks that the Group faces in emerging market economies such as Latin America and Turkey, see “ The Group may be materially adversely affected by developments in the emerging markets where it operates.”

Any of the above risks could have a material adverse effect on the Group’s business, financial condition and results of operations.

Since the Group’s loan portfolio is highly concentrated in Spain, adverse changes affecting the Spanish economy could have a material adverse effect on its financial condition

The Group has historically developed its lending business in Spain, which continues to be one of the main focuses of its business. The Group’s loan portfolio in Spain has been adversely affected by the deterioration of the Spanish economy since 2009. After rapid economic growth until 2007, Spanish gross domestic product (“GDP”) contracted in the period 2009-10 and 2012-13. The effects of the financial crisis were particularly pronounced in Spain given its heightened need for foreign financing as reflected by its high current account deficit, resulting from the gap between domestic investment and savings, and its public deficit. The current account imbalance has been corrected and the public deficit is in a downward trend, with GDP growth above 3% in 2015 and 2016 and unemployment falling below 20% in 2016. However, real or perceived difficulties in servicing public or private debt, triggered by foreign or domestic factors such as an increase in global financial risk or a decrease in the rate of domestic growth, could increase Spain’s financing costs, hindering economic growth, employment and households’ gross disposable income.

 

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The Spanish economy is particularly sensitive to economic conditions in the Eurozone, the main market for Spanish goods and services exports. Accordingly, an interruption in the recovery in the Eurozone might have an adverse effect on Spanish economic growth. Given the relevance of the Group’s loan portfolio in Spain, any adverse changes affecting the Spanish economy could have a material adverse effect on the Group’s business, financial condition and results of operations.

Any decline in the Kingdom of Spain’s sovereign credit ratings could adversely affect the Group’s business, financial condition and results of operations

Since the Bank is a Spanish company with substantial operations in Spain, its credit ratings may be adversely affected by the assessment by rating agencies of the creditworthiness of the Kingdom of Spain. As a result, any decline in the Kingdom of Spain’s sovereign credit ratings could result in a decline in the Bank’s credit ratings. In addition, the Group holds a substantial amount of securities issued by the Kingdom of Spain, autonomous communities within Spain and other Spanish issuers. Any decline in the Kingdom of Spain’s credit ratings could adversely affect the value of the Kingdom of Spain’s and other public or private Spanish issuers’ respective securities held by the Group in its various portfolios or otherwise materially adversely affect the Group’s business, financial condition and results of operations. Furthermore, the counterparties to many of the Group’s loan agreements could be similarly affected by any decline in the Kingdom of Spain’s credit ratings, which could limit their ability to raise additional capital or otherwise adversely affect their ability to repay their outstanding commitments to the Group and, in turn, materially and adversely affect the Group’s business, financial condition and results of operations.

The Group may be materially adversely affected by developments in the emerging markets where it operates

The economies of some of the emerging markets where the Group operates, mainly Latin America and Turkey, experienced significant volatility in recent decades, characterized, in some cases, by slow or declining growth, declining investment and hyperinflation.

Emerging markets are generally subject to greater risks than more developed markets. For example, there is typically a greater risk of loss from unfavorable political and economic developments, social and geopolitical instability, and changes in governmental policies, including expropriation, nationalization, international ownership legislation, interest-rate caps and tax policies, and political unrest, such as the attempted coup in Turkey on July 15, 2016 and state of emergency entitling the exercise of additional powers by the Turkish government first declared on July 20, 2016. In addition, these emerging markets are affected by conditions in other related markets and in global financial markets generally and some are particularly affected by commodities price fluctuations, which in turn may affect financial market conditions through exchange rate fluctuations, interest rate volatility and deposits volatility. As a global economic recovery remains fragile, there are risks of deterioration. If the global economic conditions deteriorate, the business, financial condition, operating results and cash flows of the Bank’s subsidiaries in emerging economies, mainly in Latin America and Turkey, may be materially adversely affected.

Furthermore, financial turmoil in any particular emerging market could negatively affect other emerging markets or the global economy in general. Financial turmoil in emerging markets tends to adversely affect stock prices and debt securities prices of other emerging markets as investors move their money to more stable and developed markets, and may reduce liquidity to companies located in the affected markets. An increase in the perceived risks associated with investing in emerging economies in general, or the emerging market economies where the Group operates in particular, could dampen capital flows to such economies and adversely affect such economies.

In addition, any changes in laws, regulations and policies pursued by the incoming U.S. Government may adversely affect the emerging markets in which the Group operates, particularly Mexico due to the trade and other ties between Mexico and the United States.

 

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If economic conditions in the emerging market economies where the Group operates deteriorate, the Group’s business, financial condition and results of operations could be materially adversely affected.

The Group’s earnings and financial condition have been, and its future earnings and financial condition may continue to be, materially affected by depressed asset valuations resulting from poor market conditions

Severe market events such as the past sovereign debt crisis, rising risk premiums and falls in share market prices, have resulted in the Group recording large write-downs on its credit market exposures in recent years. Several factors could further depress the valuation of our assets. Current political processes such as the implementation of the “Brexit” referendum for the United Kingdom to leave the European Union, the surge of populist trends in several European countries or potential changes in U.S. economic policies implemented by the new administration, could increase global financial volatility and lead to the reallocation of assets. Doubts on the asset quality of European banks have also affected their evolution in the market during 2016 and such doubts might remain in 2017. In addition, uncertainty about China’s growth expectations and its policymaking capability to address certain severe future challenges has recently resulted in sudden and intense deterioration of the valuation of global assets and further increased volatility in the global financial markets. Additionally, in dislocated markets, hedging and other risk management strategies may not be as effective as they are in more normal market conditions due in part to the decreasing credit quality of hedge counterparties. Any deterioration in economic and financial market conditions could lead to further impairment charges and write-downs.

Exposure to the real estate market makes the Group vulnerable to developments in this market

The Group has substantial exposure to the real estate market, mainly in Spain, Mexico and the United States. The Group is exposed to the real estate market due to the fact that real estate assets secure many of its outstanding loans and due to the significant amount of real estate assets held on its balance sheet. Any deterioration of real estate prices could materially and adversely affect the Group’s business, financial condition and results of operations.

Legal, Regulatory and Compliance Risks

The Group is subject to substantial regulation and regulatory and governmental oversight. Changes in the regulatory framework could have a material adverse effect on its business, results of operations and financial condition

The financial services industry is among the most highly regulated industries in the world. In response to the global financial crisis and the European sovereign debt crisis, governments, regulatory authorities and others have made and continue to make proposals to reform the regulatory framework for the financial services industry to enhance its resilience against future crises. Legislation has already been enacted and regulations issued in response to some of these proposals. The regulatory framework for financial institutions is likely to undergo further significant change. This creates significant uncertainty for the Group and the financial industry in general. The wide range of recent actions or current proposals includes, among other things, provisions for more stringent regulatory capital and liquidity standards, restrictions on compensation practices, special bank levies and financial transaction taxes, recovery and resolution powers to intervene in a crisis including “bail-in” of creditors, separation of certain businesses from deposit taking, stress testing and capital planning regimes, heightened reporting requirements and reforms of derivatives, other financial instruments, investment products and market infrastructures.

In addition, the new institutional structure in Europe for supervision, with the creation of the single supervisor, and for resolution, with the single resolution mechanism, is changing the supervisory landscape. The specific effects of a number of new laws and regulations remain uncertain because the drafting and implementation of these laws and regulations are still ongoing. In addition, since some of these laws and regulations have been recently adopted, the manner in which they are applied to the operations of financial institutions is still evolving. No assurance can be given that laws or regulations will be enforced or interpreted in a manner that will not have a material adverse effect on the Group’s business, financial condition, results of operations and cash flows. In addition, regulatory scrutiny under existing laws and regulations has become more intense.

 

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Furthermore, regulatory and supervisory authorities have substantial discretion in how to regulate and supervise banks, and this discretion, and the means available to regulators and supervisors, have been steadily increasing during recent years. Regulation may be imposed on an ad hoc basis by governments and regulators in response to a crisis, and these may especially affect financial institutions that are deemed to be systemically important (including institutions deemed to be of local systemic importance, domestic systemically important banks or “D-SIBs”, such as the Bank).

In addition, local regulations in certain jurisdictions where the Group operates differ in a number of material respects from equivalent regulations in Spain or the United States. Changes in regulations may have a material adverse effect on the Group’s business, results of operations and financial condition, particularly in Mexico, the United States, Venezuela, Argentina and Turkey. Furthermore, regulatory fragmentation, with some countries implementing new and more stringent standards or regulation, could adversely affect the Group’s ability to compete with financial institutions based in other jurisdictions which do not need to comply with such new standards or regulation. In addition, financial institutions which are based in other jurisdictions, including the United States, could benefit from any deregulation efforts implemented in such jurisdictions. Moreover, to the extent recently adopted regulations are implemented inconsistently in the various jurisdictions in which the Group operates, the Group may face higher compliance costs.

Any required changes to the Group’s business operations resulting from the legislation and regulations applicable to such business could result in significant loss of revenue, limit the Group’s ability to pursue business opportunities in which the Group might otherwise consider engaging, affect the value of assets that the Group holds, require the Group to increase its prices and therefore reduce demand for its products, impose additional costs on the Group or otherwise adversely affect the Group’s businesses. For example, the Group is subject to substantial regulation relating to liquidity. Future liquidity standards could require it to maintain a greater proportion of its assets in highly liquid but lower-yielding financial instruments, which would negatively affect its net interest margin. Moreover, the Group’s regulators, as part of their supervisory function, periodically review the Group’s allowance for loan losses. Such regulators may require the Group to increase its allowance for loan losses or to recognize further losses. Any such additional provisions for loan losses, as required by these regulatory agencies whose views may differ from those of the Group’s management, could have an adverse effect on the Group’s earnings and financial condition.

Adverse regulatory developments or changes in government policy relating to any of the foregoing or other matters could have a material adverse effect on the Group’s business, results of operations and financial condition.

Increasingly onerous capital requirements may have a material adverse effect on the Bank’s business, financial condition and results of operations

As a Spanish credit institution, the Bank is subject to Directive 2013/36/EU of the European Parliament and of the Council of June 26, 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (the “CRD IV Directive”), through which the EU began implementing the Basel III capital reforms, with effect from January 1, 2014, with certain requirements in the process of being phased in until January 1, 2019. The core regulation regarding the solvency of credit entities is Regulation (EU) No. 575/2013 of the European Parliament and of the Council of June 26, 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No. 648/2012 (the “CRR” and, together with the CRD IV Directive and any measures implementing the CRD IV Directive or the CRR which may from time to time be introduced in Spain, “CRD IV”), which is complemented by several binding regulatory technical standards, all of which are directly applicable in all EU Member States, without the need for national implementation measures. The implementation of CRD IV Directive into Spanish law has taken place through Royal Decree-Law 14/2013 of November 29 (“RD-L 14/2013”), Law 10/2014 of June 26, on the organization, supervision and solvency of credit institutions (“Law 10/2014”), Royal Decree 84/2015, of February 13 (“RD 84/2015”), Bank of Spain Circular 2/2014, of January 31 and Bank of Spain Circular 2/2016 of February 2 (the “Bank of Spain Circular 2/2016”). On November 23, 2016, the European Commission published a package of proposals with further reforms to CRD IV, Directive 2014/59/EU of May 15 establishing a framework for the recovery and resolution of credit institutions and investment firms (the “BRRD”) and Regulation (EU) No. 806/2014 of the European Parliament and the Council of the European Union

 

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(the “SRM Regulation”) (the “EU Banking Reforms”), including measures to increase the resilience of EU institutions and enhance financial stability. The timing for the final implementation of these reforms as at the date of this Annual Report is unclear.

CRD IV has, among other things, established minimum “Pillar 1” capital requirements and increased the level of capital required by means of a “combined buffer requirement” that entities must comply with from 2016 onwards. The “combined buffer requirement” has introduced five new capital buffers: (i) the capital conservation buffer, (ii) the global systemically important institutions buffer (the “G-SIB buffer”), (iii) the institution-specific countercyclical buffer, (iv) the other systemically important institutions buffer (the “D-SIB buffer”) and (v) the systemic risk buffer. The “combined buffer requirement” applies in addition to the minimum “Pillar 1” capital requirements and is required to be satisfied with Common Equity Tier 1 (“CET1”) capital.

The G-SIB buffer applies to those institutions included on the list of global systemically important banks (“G-SIBs”), which is updated annually by the Financial Stability Board (the “FSB”). The Bank has been excluded from this list with effect from January 1, 2017 and so, unless otherwise indicated by the FSB (or the Bank of Spain) in the future, it will no longer be required to maintain a G-SIB buffer.

The Bank of Spain announced on November 7, 2016 that the Bank will continue to be considered a D-SIB, and consequently the Bank will be required to maintain during 2017 a D-SIB buffer of a CET1 capital ratio of 0.75% on a consolidated basis. The D-SIB buffer is being phased-in from January 1, 2016 to January 1, 2019, with the result that the D-SIB buffer applicable to the Bank for 2017 is a CET1 capital ratio of 0.375% on a consolidated basis.

The Bank of Spain has greater discretion in relation to the institution-specific countercyclical buffer, the buffer for D-SIBs and the systemic risk buffer (a buffer to prevent systemic or macro prudential risks). With the entry into force of the Single Supervisory Mechanism (the “SSM”) on November 4, 2014, the ECB also has the ability to provide certain recommendations in this respect.

The Bank of Spain agreed in December 2015 to set the countercyclical capital buffer applicable to credit exposures in Spain at 0% from January 1, 2016. These percentages are revised each quarter and, accordingly, the Bank of Spain agreed in March 2017 to maintain the countercyclical capital buffer at 0% for the second quarter of 2017.

Moreover, Article 104 of the CRD IV Directive, as implemented by Article 68 of Law 10/2014, and similarly Article 16 of Council Regulation (EU) No. 1024/2013 of October 15, 2013 conferring specific tasks on the ECB concerning policies relating to the prudential supervision of credit institutions (the “SSM Framework Regulation”), also contemplates that in addition to the minimum “Pillar 1” capital requirements and the combined buffer requirements, supervisory authorities may impose (above “Pillar 1” requirements and below the combined buffer requirements) further “Pillar 2” capital requirements to cover other risks, including those not considered to be fully captured by the minimum “own funds” “Pillar 1” requirements under CRD IV or to address macro-prudential considerations.

In accordance with the SSM Framework Regulation, the ECB has fully assumed its new supervisory responsibilities of BBVA and the Group within the SSM. The ECB is required under the SSM Framework Regulation to carry out a supervisory review and evaluation process (the “SREP”) of BBVA and the Group at least on an annual basis.

In addition to the above, the European Banking Authority (the “EBA”) published on December 19, 2014 its final guidelines for common procedures and methodologies in respect of the SREP (the “EBA SREP Guidelines”). Included in this were the EBA’s proposed guidelines for a common approach to determining the amount and composition of additional “Pillar 2” own funds requirements to be implemented from January 1, 2016. Under these guidelines, national supervisors should set a composition requirement for the “Pillar 2” requirements to cover certain specified risks of at least 56% CET1 capital and at least 75% Tier 1 capital, as it has also been included in the EU Banking Reforms. The guidelines also contemplate that national supervisors should not set additional own funds requirements in respect of risks which are already covered by the “combined buffer requirement” and/or additional macro-prudential requirements.

Any additional “Pillar 2” own funds requirement that may be imposed on the Bank and/or the Group by the ECB pursuant to the SREP will require the Bank and/or the Group to hold capital levels above the minimum “Pillar 1” capital requirements.

 

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As a result of the most recent SREP carried out by the ECB in 2016, the Bank has been informed by the ECB that, effective from January 1, 2017, it is required to maintain (i) a CET1 phased-in capital ratio of 7.625% (on a consolidated basis) and 7.25% (on an individual basis); and (ii) a phased-in total capital ratio of 11.125% (on a consolidated basis) and 10.75% (on an individual basis).

This phased-in total capital ratio of 11.125 % on a consolidated basis includes (i) the minimum CET1 capital ratio required under “Pillar 1” (4.5%); (ii) the “Pillar 1” Additional Tier 1 capital requirement (1.5%); (iii) the “Pillar 1” Tier 2 capital requirement (2.0%); (iv) the additional CET1 capital requirement under “Pillar 2” (1.5%); (v) the capital conservation buffer (1.25% CET1); and (vi) the D-SIBs buffer (0.375% CET1).

As of December 31, 2016, the Bank’s phased-in total capital ratio was 15.14% on a consolidated basis and 21.83% on an individual basis. As of December 31, 2016, the Bank’s CET1 phased-in capital ratio was 12.18% on a consolidated basis and 17.56% on an individual basis. Such ratios exceed the applicable regulatory requirements described above, but there can be no assurance that the total capital requirements imposed on the Bank and/or the Group from time to time may not be higher than the levels of capital available at such point in time. There can also be no assurance as to the result of any future SREP carried out by the ECB and whether this will impose any further “Pillar 2” additional own funds requirements on the Bank and/or the Group.

The EU Banking Reforms propose new requirements that capital instruments should meet in order to be considered as Additional Tier 1 instruments or Tier 2 instruments. In accordance with the EU Banking Reforms, these new requirements are not subject to a grandfathering or exemption regime for currently issued Additional Tier 1 instruments and/or Tier 2 instruments. As a result, such instruments could be subject to regulatory uncertainties on their eligibility as capital if the EU Banking Reforms are approved in the form in which they were originally published, which may lead to regulatory capital shortfalls and ultimately a breach of the applicable minimum regulatory capital requirements.

Any failure by the Bank and/or the Group to maintain its “Pillar 1” minimum regulatory capital ratios, any “Pillar 2” additional own funds requirements and/or any “combined buffer requirement” could result in administrative actions or sanctions, which, in turn, may have a material adverse effect on the Group’s results of operations. In particular, any failure to maintain any additional capital requirements pursuant to the “Pillar 2” framework or any other capital requirements to which the Bank and/or the Group is or becomes subject (including the “combined buffer requirement”), may result in the imposition of restrictions or prohibitions on “discretionary payments” by the Bank as discussed below.

According to Article 48 of Law 10/2014, Article 73 of RD 84/2015 and Rule 24 of Bank of Spain Circular 2/2016, any entity not meeting its “combined buffer requirement” is required to determine its Maximum Distributable Amount (“MDA”) as described therein. Until the MDA has been calculated and communicated to the Bank of Spain, where applicable, the relevant entity will be subject to restrictions on (i) distributions relating to CET1 capital, (ii) payments in respect of variable remuneration or discretionary pension revenues and (iii) distributions relating to Additional Tier 1 instruments (“discretionary payments”) and, thereafter, any such discretionary payments by that entity will be subject to such MDA limit.

Furthermore, as set forth in Article 48 of Law 10/2014, the adoption by the Bank of Spain of the measures prescribed in Articles 68.2.h) and 68.2.i) of Law 10/2014, aimed at strengthening own funds or limiting or prohibiting the distribution of dividends respectively will also restrict discretionary payments to such MDA. Pursuant to the EU Banking Reforms, MDA could also be affected by a breach of MREL (as defined below) (see “— Any failure by the Bank and/or the Group to comply with its minimum requirement for own funds and eligible liabilities (MREL) could have a material adverse effect on the Bank’s business, financial condition and results of operations.” below).

As set out in the “Opinion of the European Banking Authority on the interaction of Pillar 1, Pillar 2 and combined buffer requirements and restrictions on distributions” published on December 16, 2015 (the “December 2015 EBA Opinion”), in the EBA’s opinion competent authorities should ensure that the CET1 capital to be taken into account in determining the CET1 capital available to meet the “combined buffer requirement” for the purposes of the MDA calculation is limited to the amount not used to meet the “Pillar 1” and, if applicable, “Pillar 2” own

 

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funds requirements of the institution. In addition, the December 2015 EBA Opinion advises the European Commission (i) to review Article 141 of the CRD IV Directive with a view to avoiding differing interpretations of Article 141(6) and ensure greater consistency between the maximum distributable amount framework and the capital stacking order described in the opinion and in the EBA SREP Guidelines by which the “Pillar 1” and, if applicable, “Pillar 2” capital requirements represent the minimum capital to be preserved at all times by an institution and it is only the CET1 capital of that institution not used to meet its “Pillar 1” and, if applicable, “Pillar 2” requirements that is then available to meet the “combined buffer requirement” of the institution and (ii) to review the prohibition on distributions in all circumstances where an institution fails to meet the “combined buffer requirement” and no profits are made in any given year, notably insofar as it relates to Additional Tier 1 instruments. There can be no assurance as to how and when binding effect will be given to the December 2015 EBA Opinion in Spain, including as to the consequences for an institution of its capital levels falling below those necessary to meet these requirements. The EU Banking Reforms propose certain amendments in order to clarify, for the purposes of restrictions on distributions, the hierarchy between the “Pillar 2” additional own funds requirements, the minimum “own funds” “Pillar 1” requirements, the own funds and eligible liabilities requirement, MREL requirements and the “combined buffer requirements” (which is referred to as “stacking order”). Furthermore, pursuant to the EU Banking Reforms, an institution would not be entitled to make distributions relating to CET1 capital or payments in respect of variable remuneration or discretionary pension revenues, before having made the payments due on Additional Tier 1 instruments.

On July 1, 2016, the EBA published additional information explaining how supervisors intend to use the results of an EU-wide stress test for SREP in 2016 (which results were published on July 29, 2016). The EBA stated, among other things, that the incorporation of the quantitative results of the EU-wide stress test into SREP assessments may include setting additional supervisory monitoring metrics in the form of capital guidance. Such guidance will not be included in MDA calculations but competent authorities would expect banks to meet that guidance except when explicitly agreed. Competent authorities have remedial tools if an institution refuses to follow such guidance. The EU Banking Reforms also propose that a distinction be made between “Pillar 2” capital requirements and guidance, with only the former being mandatory requirements. Notwithstanding the foregoing, the EU Banking Reforms propose that supervisory authorities be entitled to impose further “Pillar 2” capital requirements where an institution repeatedly fails to follow the guidance previously imposed.

The ECB has also set out in its recommendation of December 13, 2016 on dividend distribution policies that credit institutions should establish dividend policies using conservative and prudent assumptions in order, after any distribution, to satisfy the applicable capital requirements.

Any failure by the Bank and/or the Group to comply with its regulatory capital requirements could also result in the imposition of further “Pillar 2” requirements and the adoption of any early intervention or, ultimately, resolution measures by resolution authorities pursuant to Law 11/2015 of June 18 on the Recovery and Resolution of Credit Institutions and Investment Firms (Ley 11/2015 de 18 de junio de recuperación y resolución de entidades de crédito y empresas de servicios de inversión), as amended, replaced or supplemented from time to time (“Law 11/2015”), which, together with Royal Decree 1012/2015 of November 6 by virtue of which Law 11/2015 is developed and Royal Decree 2606/1996 of December 20 on credit entities’ deposit guarantee fund is amended (“RD 1012/2015”), has implemented the BRRD into Spanish law. See “— Bail-in and write-down powers under the BRRD may adversely affect our business and the value of any securities we may issue” below.

At its meeting of January 12, 2014, the oversight body of the Basel Committee on Banking Supervision (“BCBS”) endorsed the definition of the leverage ratio set forth in CRD IV, to promote consistent disclosure, which applied from January 1, 2015. There will be a mandatory minimum capital requirement on January 1, 2018, with an initial minimum leverage ratio of 3% that can be raised after calibration. The proposed revisions to the design and calibration of the leverage ratio were set out in the BCBS April 2016 consultation paper entitled “Revisions to the Basel III leverage ratio framework”. The consultation period ended on July 6, 2016, and BCBS shall finalize the calibration of the leverage ratio for it to be implemented by January 1, 2018. The EU Banking Reforms propose a binding leverage ratio requirement of 3% of Tier 1 capital that is added to an institution’s own funds requirements and that an institution must meet in addition to its risk based requirements.

 

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Basel III implementation differs across jurisdictions in terms of timing and applicable rules. This lack of uniformity among implemented rules may lead to an uneven playing field and to competition distortions. Moreover, the lack of regulatory coordination, with some countries bringing forward the application of Basel III requirements or increasing such requirements, could adversely affect a bank with global operations such as the Bank and could undermine its profitability.

There can be no assurance that the implementation of the above capital requirements will not adversely affect the Bank’s ability to pay “discretionary payments” or result in the cancellation of such payments (in whole or in part), or require the Bank to issue additional securities that qualify as regulatory capital, to liquidate assets, to curtail business or to take any other actions, any of which may have adverse effects on the Bank’s business, financial condition and results of operations. Furthermore, increased capital requirements may negatively affect the Bank’s return on equity and other financial performance indicators.

Bail-in and write-down powers under the BRRD may adversely affect our business and the value of any securities we may issue

The BRRD (which has been implemented in Spain through Law 11/2015 and RD 1012/2015) is designed to provide authorities with a credible set of tools to intervene sufficiently early and quickly in unsound or failing credit institutions or investment firms (each, an “institution”) so as to ensure the continuity of the institution’s critical financial and economic functions, while minimizing the impact of an institution’s failure on the economy and financial system. The BRRD further provides that any extraordinary public financial support through additional financial stabilization tools is only to be used by a Member State as a last resort, after having assessed and exploited the below resolution tools to the maximum extent possible while maintaining financial stability.

In accordance with Article 20 of Law 11/2015, an institution will be considered as failing or likely to fail in any of the following circumstances: (i) it is, or is likely in the near future to be, in significant breach of its solvency or any other requirements necessary for maintaining its authorization; (ii) its assets are, or are likely in the near future to be, less than its liabilities; (iii) it is, or is likely in the near future to be, unable to pay its debts as they fall due; or (iv) it requires extraordinary public financial support (except in limited circumstances). The determination that an institution is no longer viable may depend on a number of factors which may be outside of that institution’s control.

As provided in the BRRD, Law 11/2015 contains four resolution tools and powers which may be used alone or in combination where the Fund for Orderly Bank Restructuring (Fondo de Restructuración Ordenada Bancaria) (the “FROB”), the Single Resolution Mechanism (“SRM”) or, as the case may be and according to Law 11/2015, the Bank of Spain or the Spanish Securities Market Commission or any other entity with the authority to exercise any such tools and powers from time to time (each, a “Relevant Spanish Resolution Authority”) as appropriate, considers that (a) an institution is failing or likely to fail, (b) there is no reasonable prospect that any alternative private sector measures would prevent the failure of such institution within a reasonable timeframe and (c) a resolution action is in the public interest. The four resolution tools are (i) sale of business, which enables resolution authorities to direct the sale of the institution or the whole or part of its business on commercial terms; (ii) bridge institution, which enables resolution authorities to transfer all or part of the business of the institution to a “bridge institution” (an entity created for this purpose that is wholly or partially in public control), which may limit the capacity of the institution to meet its repayment obligations; (iii) asset separation, which enables resolution authorities to transfer impaired or problem assets to one or more asset management vehicles to allow them to be managed with a view to maximizing their value through eventual sale or orderly wind-down (this can be used together with another resolution tool only); and (iv) bail-in, by which the Relevant Spanish Resolution Authority may exercise the Spanish Bail-in Power (as defined below). This includes the ability of the Relevant Spanish Resolution Authority to write down and/or convert into equity or other securities or obligations (which equity, securities and obligations could also be subject to any future application of the Spanish Bail-in Power) any obligation of an institution.

The “Spanish Bail-in Power” is any write-down, conversion, transfer, modification or suspension power existing from time to time under, and exercised in compliance with, any laws, regulations, rules or requirements in effect in Spain, relating to the transposition of the BRRD, as amended from time to time, including but not limited to (i) Law 11/2015, as amended from time to time; (ii) RD 1012/2015, as amended from time to time; (iii) the SRM

 

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Regulation, as amended from time to time; and (iv) any other instruments, rules or standards made in connection with either (i), (ii) or (iii), pursuant to which any obligation of an institution can be reduced (which may result in the reduction of the relevant claim to zero), cancelled, modified, transferred or converted into shares, other securities, or other obligations of such institution or any other person (or suspended for a temporary period).

In accordance with Article 48 of Law 11/2015 (and subject to any exclusions that may be applied by the Relevant Spanish Resolution Authority under Article 43 of Law 11/2015), in the case of any application of the Spanish Bail-in Power, the sequence of any resulting write-down or conversion by the Relevant Spanish Resolution Authority shall be in the following order: (i) CET1 instruments; (ii) Additional Tier 1 instruments; (iii) Tier 2 instruments; (iv) other subordinated claims that do not qualify as Additional Tier 1 capital or Tier 2 capital; and (v) the eligible senior claims prescribed in Article 41 of Law 11/2015.

In addition to the Spanish Bail-in Power, the BRRD and Law 11/2015 provide for resolution authorities to have the further power to permanently write-down or convert into equity capital instruments at the point of non-viability (“Non-Viability Loss Absorption”) of an institution or a group. The point of non-viability of an institution is the point at which the Relevant Spanish Resolution Authority determines that the institution meets the conditions for resolution or will no longer be viable unless the relevant capital instruments are written down or converted into equity or extraordinary public support is to be provided and without such support the Relevant Spanish Resolution Authority determines that the institution would no longer be viable. The point of non-viability of a group is the point at which the group infringes or there are objective elements to support a determination that the group, in the near future, will infringe its consolidated solvency requirements in a way that would justify action by the Relevant Spanish Resolution Authority in accordance with article 38.3 of Law 11/2015. Non-Viability Loss Absorption may be imposed prior to or in combination with any exercise of the Spanish Bail-in Power or any other resolution tool or power (where the conditions for resolution referred to above are met).

Any application of the Spanish Bail-in Power or Non-Viability Loss Absorption under the BRRD shall be in accordance with the hierarchy of claims in normal insolvency proceedings (unless otherwise provided by the laws, regulations, requirements, guidelines and policies relating to capital adequacy, resolution and/or solvency then applicable to the Bank and/or the Group, including, without limitation to the generality of the foregoing, CRD IV, the BRRD and those regulations, requirements, guidelines and policies relating to capital adequacy, resolution and/or solvency then in effect in Spain (whether or not such requirements, guidelines or policies have the force of law and whether or not they are applied generally or specifically to the Bank and/or the Group)).

To the extent that any resulting treatment of a holder of the Bank’s securities pursuant to the exercise of the Spanish Bail-in Power or Non-Viability Loss Absorption is less favorable than would have been the case under such hierarchy in normal insolvency proceedings, a holder of such affected securities would have a right to compensation under the BRRD based on an independent valuation of the institution. Any such compensation is unlikely to compensate that holder for the losses it has actually incurred and there is likely to be a considerable delay in the recovery of such compensation. Compensation payments (if any) are also likely to be made considerably later than when amounts may otherwise have been due under the affected securities.

The powers set out in the BRRD as implemented through Law 11/2015 and RD 1012/2015 impact how credit institutions and investment firms are managed, as well as, in certain circumstances, the rights of creditors. Pursuant to Law 11/2015, holders of, among others, unsecured debt securities, subordinated obligations and shares issued by us may be subject to, among other things, a write-down and/or conversion into equity or other securities or obligations on any application of the Spanish Bail-in Power and in the case of capital instruments may also be subject to any Non-Viability Loss Absorption. The exercise of any such powers (or any of the other resolution powers and tools) may result in such holders of such securities losing some or all of their investment or otherwise having their rights under such securities adversely affected. Such exercise could also involve modifications to, or the disapplication of, provisions in the terms and conditions of certain securities including alteration of the principal amount or any interest payable on debt instruments, the maturity date or any other dates on which payments may be due, as well as the suspension of payments for a certain period. As a result, the exercise of the Spanish Bail-in Power or, where applicable, the Non-Viability Loss Absorption with respect to such securities or the taking by an authority of any other action, or any suggestion that the exercise or taking of any such action may happen, could materially adversely affect the rights of holders of such securities, the market price or value or trading behavior of our securities and/or the ability of the Bank to satisfy its obligations under any such securities.

 

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The exercise of the Spanish Bail-in Power and/or Non-Viability Loss Absorption by the Relevant Spanish Resolution Authority is likely to be inherently unpredictable and may depend on a number of factors which may also be outside of the Bank’s control. In addition, as the Relevant Spanish Resolution Authority will retain an element of discretion, holders of such securities may not be able to refer to publicly available criteria in order to anticipate any potential exercise of any such Spanish Bail-in Power and/or Non-Viability Loss Absorption. Because of this inherent uncertainty, it will be difficult to predict when, if at all, the exercise of any such powers by the Relevant Spanish Resolution Authority may occur.

This uncertainty may adversely affect the value of the unsecured debt securities, subordinated obligations and shares issued by us. The price and trading behavior of such securities may be affected by the threat of a possible exercise of any power under Law 11/2015 (including any early intervention measure before any resolution) or any suggestion of such exercise, even if the likelihood of such exercise is remote. Moreover, the Relevant Spanish Resolution Authority may exercise any such powers without providing any advance notice to the holders of affected securities.

In addition, the EBA’s preparation of certain regulatory technical standards and implementing technical standards to be adopted by the European Commission and certain other guidelines is pending. These acts could be potentially relevant to determining when or how a Relevant Spanish Resolution Authority may exercise the Spanish Bail-in Power. The pending acts include guidelines on the treatment of shareholders in bail-in or the write-down and conversion of capital instruments, and on the rate of conversion of debt to equity or other securities or obligations in any bail-in. No assurance can be given that, once adopted, these standards will not be detrimental to the rights under, and the value of unsecured debt securities, subordinated obligations and shares issued by us.

Any failure by the Bank and/or the Group to comply with its minimum requirement for own funds and eligible liabilities (MREL) could have a material adverse effect on the Bank’s business, financial condition and results of operations

The BRRD prescribes that banks shall hold a minimum level of own funds and eligible liabilities in relation to total liabilities (“MREL”). According to Commission Delegated Regulation (EU) 2016/1450 of May 23, 2016 (the “MREL Delegated Regulation”), the level of own funds and eligible liabilities required under MREL will be set by the resolution authority for each bank (and/or group) based on, among other things, the criteria set forth in Article 45.6 of the BRRD, including the systemic importance of the institution. Eligible liabilities may be senior or subordinated, provided that, among other requirements, they have a remaining maturity of at least one year and, if governed by a non-EU law, they must be able to be written down or converted by the resolution authority of a Member State under that law or through contractual provisions.

The MREL requirement came into force on January 1, 2016. However, the EBA has recognized the impact which this requirement may have on banks’ funding structures and costs, and the MREL Delegated Regulation states that the resolution authorities shall determine an appropriate transitional period but that this shall be as short as possible. As part of the EU Banking Reforms, the European Commission published on November 23, 2016 a Proposal for a Directive of the European Parliament and the Council on amendments to the BRRD as regards the ranking of unsecured debt instruments in the insolvency hierarchy (the “MREL Proposal”). The MREL Proposal proposes to harmonize national laws on recovery and resolution of credit institutions and investment firms, in particular as regards their loss-absorbency and recapitalization capacity in resolution, and proposes the creation of a new asset class of “non-preferred” senior debt that should only be bailed-in after other capital instruments but before other senior liabilities. The MREL Proposal anticipates that Member States will transpose the proposed amendments into the BRRD in their national laws by approximately June 2017 and that banks to which the amendments apply will have to comply with the amended rules by approximately July 2017.

The EU Banking Reforms establish the new conditions that would need to be met by an instrument so that it can be considered as an eligible liability and which would then be used to comply with MREL requirements. In addition, the EU Banking Reforms establish some exemptions which could allow outstanding senior debt

 

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instruments to be used to comply with MREL requirements. However, there is uncertainty regarding the final form of the EU Banking Reforms insofar as such eligibility is concerned and how those regulations and exemptions are to be interpreted and applied. This uncertainty may impact upon the ability of the Bank to comply with its MREL requirements (at both individual and consolidated levels) on due date.

On November 9, 2015, the FSB published its final Total Loss-Absorbing Capacity (“TLAC”) Principles and Term Sheet (the “TLAC Principles and Term Sheet”), proposing that G-SIBs maintain significant minimum amounts of liabilities that are subordinated (by law, contract or structurally) to certain prior-ranking liabilities, such as guaranteed insured deposits, and forming a new standard for G-SIBs. The TLAC Principles and Term Sheet contain a set of principles on loss-absorbing and recapitalization capacity of G-SIBs in resolution and a term sheet for the implementation of these principles in the form of an internationally agreed standard. The FSB will undertake a review of the technical implementation of the TLAC Principles and Term Sheet by the end of 2019. The TLAC Principles and Term Sheet require a minimum TLAC requirement to be determined individually for each G-SIB at the greater of (a) 16% of risk-weighted assets as of January 1, 2019 and 18% as of January 1, 2022, and (b) 6% of the Basel III Tier 1 leverage ratio exposure measured as of January 1, 2019, and 6.75% as of January 1, 2022. The Bank is no longer classified as a G-SIB by the FSB with effect from January 1, 2017. However, if the Bank were to be so classified in the future or if TLAC requirements as set out below are adopted and implemented in Spain and extended to non-G-SIBs through the imposition of similar MREL requirements, then this could create additional minimum requirements for the Bank.

In this regard, the EBA submitted on December 14, 2016 a final report on the implementation and design of the MREL framework (the “EBA MREL Report”), which contains a number of recommendations to amend the current MREL framework. Additionally, the EU Banking Reforms contain the legislative proposal of the European Commission for the amendment of the MREL framework and the implementation of the TLAC standards. The EU Banking Reforms propose the amendment of a number of aspects of the MREL framework to align it with the TLAC standards included in the TLAC Principles and Term Sheet. To maintain coherence between the MREL rules applicable to G-SIBs and those applicable to non-G-SIBs, the EU Banking Reforms also propose a number of changes to the MREL rules applicable to non-G-SIBs. While the EU Banking Reforms propose for a minimum harmonized or “Pillar 1” MREL requirement for G-SIBs, in the case of non-G-SIBs, it is proposed that MREL requirements will be imposed on a bank-specific basis. For G-SIBs, it is also proposed that a supplementary or “Pillar 2” MREL requirement may be further imposed on a bank-specific basis. The EU Banking Reforms further provide for the resolution authorities to give guidance to an institution to have own funds and eligible liabilities in excess of the requisite levels for certain purposes.

If the Relevant Spanish Resolution Authority finds that there could exist any obstacles to resolvability by the Bank and/or the Group, a higher MREL requirement could be imposed.

Neither the BRRD nor the MREL Delegated Regulation provides details on the implications of a failure by an institution to comply with its MREL requirement. However, the EU Banking Reforms propose that this be addressed by the relevant authorities on the basis of their powers to address or remove impediments to resolution, the exercise of their supervisory powers under the CRD IV Directive, early intervention measures, and administrative penalties and other administrative measures.

Furthermore, in accordance with the EBA MREL Report, the EBA recommends that resolution authorities and competent authorities should engage in active monitoring of compliance with their respective requirements and considers that (i) the powers of resolution authorities to respond to a breach of MREL should be enhanced (which would require resolution authorities to be given the power to require the preparation and execution of an MREL restoration plan, to use their powers to address impediments to resolvability, to request that distribution restrictions be imposed on an institution by a competent authority and to request a joint restoration plan in cases where an institution breaches both MREL and minimum capital requirements); (ii) competent authorities should also respond to breaches of minimum capital requirements and MREL; (iii) resolution authorities should assume a lead role in responding to a failure to issue or roll over MREL-eligible debt leading to a breach of MREL; (iv) if there are both losses and a failure to roll over or issue MREL-eligible debt, both the relevant resolution authority and relevant competent authority should attempt to agree on a joint restoration plan (provided that both authorities believe that the institution is not failing or likely to fail); and (v) resolution and competent authorities should closely cooperate

 

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and coordinate. The EU Banking Reforms also provide for resolution and competent authorities to consult each other in the exercise of their respective powers in relation to any breaches of MREL. In addition, under the EBA Guidelines on triggers for use of early intervention measures of May 8, 2015 a significant deterioration in the amount of eligible liabilities and own funds held by an institution for the purposes of meeting its MREL requirements may put an institution in a situation where conditions for early intervention are met, which may result in the application by the competent authority of early intervention measures.

Further, as outlined in the EBA MREL Report, the EBA’s recommendation is that an institution will not be able to use the same CET 1 capital to meet both MREL and the combined buffer requirements. In addition, the EU Banking Reforms provide that, in the case of the own funds of an institution that may otherwise contribute to the combined buffer requirement where there is any shortfall in MREL, this will be considered as a failure to meet the combined buffer requirement such that those own funds will automatically be used instead to meet that institution’s MREL requirement and will no longer count towards its combined buffer requirement. Accordingly, this could trigger a limit on discretionary payments (see “ Increasingly onerous capital requirements may have a material adverse effect on the Bank’s business, financial condition and results of operations”). Additionally, if the Relevant Spanish Resolution Authority finds that there could exist any obstacles to resolvability by the Bank and/or the Group, a higher MREL requirement could be imposed.

Moreover, with respect to the EU Banking Reforms, there are uncertainties concerning how the subsidiaries of the Group would be treated for purposes of determining the resolution group of the Bank and the applicable MREL requirements, which may lead to a situation where the consolidated MREL requirement of the Bank would not fully reflect its multiple-point-of-entry resolution strategy.

Any failure by the Bank and/or the Group to comply with its MREL requirement may have a material adverse effect on the Bank’s business, financial conditions and results of operations and could result in the imposition of restrictions or prohibitions on discretionary payments by the Bank, including the payment of dividends and distributions relating to Additional Tier 1 instruments. There can also be no assurance as to the relationship between the “Pillar 2” additional own funds requirements, the “combined buffer requirement”, the MREL requirement once implemented in Spain and the restrictions or prohibitions on discretionary payments.

Increased taxation and other burdens imposed on the financial sector may have a material adverse effect on the Bank’s business, financial condition and results of operations

On February 14, 2013, the European Commission published a proposal (the “Commission’s Proposal”) for a Directive for a common financial transaction tax (“FTT”) in Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia (the “participating Member States”). However, Estonia has since stated that it will not participate.

The Commission’s Proposal has very broad scope and could, if introduced, apply to certain dealings in securities issued by the Group or other issuers (including secondary market transactions) in certain circumstances.

Under the Commission’s Proposal, the FTT could apply in certain circumstances to persons both within and outside the participating Member States. Generally, it would apply to certain dealings in securities where at least one party is a financial institution and at least one party is established in a participating Member State. A financial institution may be, or be deemed to be, “established” in a participating Member State in a broad range of circumstances, including (a) by transacting with a person established in a participating Member State or (b) where the financial instrument which is subject to the dealings is issued in a participating Member State.

However, the FTT proposal remains subject to negotiation among the participating Member States. It may therefore be altered prior to any implementation, the timing of which remains unclear. Additional EU Member States may decide to participate and participating Member States may decide not to participate.

Royal Decree-Law 8/2014, of July 4, introduced a 0.03% tax on bank deposits in Spain. This tax is payable annually by Spanish banks. There can be no assurance that additional national or transnational bank levies or financial transaction taxes will not be adopted by the authorities of the jurisdictions where the Bank operates.

 

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Contributions for assisting in the future recovery and resolution of the Spanish banking sector may have a material adverse effect on the Bank’s business, financial condition and results of operations.

In 2015, Law 11/2015 and RD 1012/2015 established a requirement for Spanish credit institutions, including BBVA, to make at least an annual ordinary contribution to the National Resolution Fund (Fondo de Resolución Nacional), payable on request of the FROB. The total amount of contributions to be made to the National Resolution Fund by all Spanish banking entities must equal at least 1% of the aggregate amount of all deposits guaranteed by the Deposit Guarantee Fund by December 31, 2024. The contribution will be adjusted to the risk profile of each institution in accordance with the criteria set out in RD 1012/2015. The FROB may, in addition, collect extraordinary contributions.

Furthermore, Law 11/2015 also established in 2015 an additional charge (tasa) which shall be used to further fund the activities of the FROB, in its capacity as a resolution authority, which charge shall equal 2.5% of the above annual ordinary contribution to be made to the National Resolution Fund.

In addition, since 2016, the Bank has been required to make contributions directly to the EU Single Resolution Fund, once the National Resolution Fund has been integrated into it, and will have to pay supervisory fees to the SSM and the SRM. See “—Regulatory developments related to the EU fiscal and banking union may have a material adverse effect on the Bank’s business, financial condition and results of operations”.

Any levies, taxes or funding requirements imposed on the Bank pursuant to the foregoing or otherwise in any of the jurisdictions where it operates could have a material adverse effect on the Bank’s business, financial condition and results of operations.

Regulatory developments related to the EU fiscal and banking union may have a material adverse effect on the Bank’s business, financial condition and results of operations

The project of achieving a European banking union was launched in the summer of 2012. Its main goal is to resume progress towards the European single market for financial services by restoring confidence in the European banking sector and ensuring the proper functioning of monetary policy in the Eurozone.

Banking union is expected to be achieved through new harmonized banking rules (the single rulebook) and a new institutional framework with stronger systems for both banking supervision and resolution that will be managed at the European level. Its two main pillars are the SSM and the SRM.

The SSM is intended to assist in making the banking sector more transparent, unified and safer. In accordance with the SSM Framework Regulation, the ECB fully assumed its new supervisory responsibilities within the SSM, in particular the direct supervision of the largest European banks (including the Bank), on November 4, 2014.

The SSM represents a significant change in the approach to bank supervision at a European and global level, even if it is not expected to result in any radical change in bank supervisory practices in the short term. The SSM has resulted in the direct supervision by the ECB of the largest financial institutions, including the Bank, and indirect supervision of around 3,500 financial institutions. The new supervisor is one of the largest in the world in terms of assets under supervision. In the coming years, the SSM is expected to work to establish a new supervisory culture importing best practices from the 19 supervisory authorities that form part of the SSM. Several steps have already been taken in this regard, such as the publication of the Supervisory Guidelines and the creation of the SSM Framework Regulation. In addition, the SSM represents an extra cost for the financial institutions that fund it through payment of supervisory fees.

The other main pillar of the EU banking union is the SRM, the main purpose of which is to ensure a prompt and coherent resolution of failing banks in Europe at minimum cost. The SRM Regulation, which was passed on July 15, 2014 and took legal effect from January 1, 2015, establishes uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of the SRM and a Single Resolution Fund. The new Single Resolution Board started operating on January 1, 2015 and fully assumed its resolution powers on January 1, 2016. The Single Resolution Fund has also been in place since January 1, 2016, funded by contributions from European banks in accordance with the methodology approved by the Council of the European

 

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Union. The Single Resolution Fund is intended to reach a total amount of €55 billion by 2024 and to be used as a separate backstop only after an 8% bail-in of a bank’s total liabilities including own funds has been applied to cover capital shortfalls (in line with the BRRD).

By allowing for the consistent application of EU banking rules through the SSM, the banking union is expected to help resume momentum toward economic and monetary union. In order to complete such union, a single deposit guarantee scheme is still needed, which may require a change to the existing European treaties. This is the subject of continued negotiation by European leaders to ensure further progress is made in European fiscal, economic and political integration.

Regulations adopted towards achieving a banking and/or fiscal union in the EU and decisions adopted by the ECB in its capacity as the Bank’s main supervisory authority may have a material effect on the Bank’s business, financial condition and results of operations. In particular, the BRRD and Directive 2014/49/EU of the European Parliament and the Council of April 16, 2014 on deposit guarantee schemes were published in the Official Journal of the EU on June 12, 2014. The BRRD was implemented into Spanish law through Law 11/2015 and RD 1012/2015. In addition, on January 29, 2014, the European Commission released its proposal on the structural reforms of the European banking sector, which will impose new constraints on the structure of European banks. The proposal is aimed at ensuring the harmonization between the divergent national initiatives in Europe. It includes a prohibition on proprietary trading similar to that contained in Section 619 of the Dodd-Frank Act (also known as the Volcker Rule) and a mechanism to potentially require the separation of trading activities (including market-making), such as in the Financial Services (Banking Reform) Act 2013, complex securitizations and risky derivatives.

There can be no assurance that regulatory developments related to the EU fiscal and banking union, and initiatives undertaken at the EU level, will not have a material adverse effect on the Bank’s business, financial condition and results of operations.

The Group’s anti-money laundering and anti-terrorism policies may be circumvented or otherwise not be sufficient to prevent all money laundering or terrorism financing

Group companies are subject to rules and regulations regarding money laundering and the financing of terrorism. Monitoring compliance with anti-money laundering and anti-terrorism financing rules can put a significant financial burden on banks and other financial institutions and pose significant technical problems. Although the Group believes that its current policies and procedures are sufficient to comply with applicable rules and regulations, it cannot guarantee that its anti-money laundering and anti-terrorism financing policies and procedures will not be circumvented or otherwise not be sufficient to prevent all money laundering or terrorism financing. Any of such events may have severe consequences, including sanctions, fines and, notably, reputational consequences, which could have a material adverse effect on the Group’s financial condition and results of operations.

The Group is exposed to risks in relation to compliance with anti-corruption laws and regulations and economic sanctions programs

The Group is required to comply with the laws and regulations of various jurisdictions where it conducts operations. In particular, its operations are subject to various anti-corruption laws, including the U.S. Foreign Corrupt Practices Act of 1977 and the United Kingdom Bribery Act of 2010, and economic sanction programs, including those administered by the United Nations, the EU and the United States, including the U.S. Treasury Department’s Office of Foreign Assets Control. The anti-corruption laws generally prohibit providing anything of value to government officials for the purposes of obtaining or retaining business or securing any improper business advantage. As part of the Bank’s business, the Bank may deal with entities the employees of which are considered government officials. In addition, economic sanctions programs restrict the Bank’s business dealings with certain sanctioned countries, individuals and entities.

Although the Bank has internal policies and procedures designed to ensure compliance with applicable anti-corruption laws and sanctions regulations, there can be no assurance that such policies and procedures will be sufficient or that its employees, directors, officers, partners, agents and service providers will not take actions in

 

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violation of the Group’s policies and procedures (or otherwise in violation of the relevant anti-corruption laws and sanctions regulations) for which it or they may be ultimately held responsible. Violations of anti-corruption laws and sanctions regulations could lead to financial penalties being imposed on the Bank, limits being placed on the Bank’s activities, the Bank’s authorizations and licenses being revoked, damage to the Bank’s reputation and other consequences that could have a material adverse effect on the Bank’s business, results of operations and financial condition. Further, litigation or investigations relating to alleged or suspected violations of anti-corruption laws and sanctions regulations could be costly.

Local regulation may have a material effect on the Bank’s business, financial condition, results of operations and cash flows

The Bank’s operations are subject to regulatory risks, including the effects of changes in laws, regulations, policies and interpretations, in the various jurisdictions outside Spain where it operates. Regulations in certain jurisdictions where the Bank operates differ in a number of material respects from equivalent regulations in Spain. For example, local regulations may require the Bank’s subsidiaries and affiliates to meet capital requirements that are different from those applicable to the Bank as a Spanish bank, they may prohibit certain activities permitted to be undertaken by the Bank in Spain or they may require certain approvals to be obtained in connection with such subsidiaries and affiliates’ activities. Changes in regulations may have a material effect on the Group’s business and operations, particularly changes affecting Mexico, the United States, Venezuela, Argentina or Turkey, which are the Group’s most significant jurisdictions by assets other than Spain.

Furthermore, the governments in certain regions where the Group operates have exercised, and continue to exercise, significant influence over the local economy. Governmental actions, including changes in laws or regulations or in the interpretation of existing laws or regulations, concerning the economy and state-owned enterprises, or otherwise affecting the Group’s activity, could have a significant effect on the private sector entities in general and on the Bank’s subsidiaries and affiliates in particular. In addition, the Group’s activities in emerging economies, such as Venezuela, are subject to a heightened risk of changes in governmental policies, including expropriation, nationalization, international ownership legislation, interest-rate caps, exchange controls, government restrictions on dividends and tax policies. Any of these risks could have a material adverse effect on the Group’s business, financial condition and results of operations.

Liquidity and Financial Risks

The Bank has a continuous demand for liquidity to fund its business activities. The Bank may suffer during periods of market-wide or firm-specific liquidity constraints, and liquidity may not be available to it even if its underlying business remains strong

Liquidity and funding continue to remain a key area of focus for the Group and the industry as a whole. Like all major banks, the Group is dependent on confidence in the short- and long-term wholesale funding markets. Should the Group, due to exceptional circumstances or otherwise, be unable to continue to source sustainable funding, its ability to fund its financial obligations could be affected.

The Bank’s profitability or solvency could be adversely affected if access to liquidity and funding is constrained or made more expensive for a prolonged period of time. Under extreme and unforeseen circumstances, such as the closure of financial markets and uncertainty as to the ability of a significant number of firms to ensure they can meet their liabilities as they fall due, the Group’s ability to meet its financial obligations as they fall due or to fulfill its commitments to lend could be affected through limited access to liquidity (including government and central bank facilities). In such extreme circumstances, the Group may not be in a position to continue to operate without additional funding support, which it may be unable to access. These factors may have a material adverse effect on the Group’s solvency, including its ability to meet its regulatory minimum liquidity requirements. These risks can be exacerbated by operational factors such as an over-reliance on a particular source of funding or changes in credit ratings, as well as market-wide phenomena such as market dislocation, regulatory change or major disasters.

 

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In addition, corporate and institutional counterparties may seek to reduce aggregate credit exposures to the Bank (or to all banks), which could increase the Group’s cost of funding and limit its access to liquidity. The funding structure employed by the Group may also prove to be inefficient, thus giving rise to a level of funding cost where the cumulative costs are not sustainable over the longer term. The funding needs of the Group may increase and such increases may be material to the Group’s business, financial condition and results of operations.

Withdrawals of deposits or other sources of liquidity may make it more difficult or costly for the Group to fund its business on favorable terms or cause the Group to take other actions

Historically, one of the Group’s principal sources of funds has been savings and demand deposits. Large-denomination time deposits may, under some circumstances, such as during periods of significant interest-rate-based competition for these types of deposits, be a less stable source of deposits than savings and demand deposits. The level of wholesale and retail deposits may also fluctuate due to other factors outside the Group’s control, such as a loss of confidence (including as a result of political initiatives, including bail-in and/or confiscation and/or taxation of creditors’ funds) or competition from investment funds or other products. The recent introduction of a national tax on outstanding deposits could be negative for the Group’s activities in Spain. Moreover, there can be no assurance that, in the event of a sudden or unexpected withdrawal of deposits or shortage of funds in the banking systems or money markets in which the Group operates, the Group will be able to maintain its current levels of funding without incurring higher funding costs or having to liquidate certain of its assets. In addition, if public sources of liquidity, such as the ECB extraordinary measures adopted in response to the financial crisis since 2008, are removed from the market, there can be no assurance that the Group will be able to maintain its current levels of funding without incurring higher funding costs or having to liquidate certain of its assets or taking additional deleverage measures.

Implementation of internationally accepted liquidity ratios might require changes in business practices that affect the profitability of the Bank’s business activities

The liquidity coverage ratio (“LCR”) is a quantitative liquidity standard developed by the BCBS to ensure that those banking organizations to which this standard is to apply have sufficient high-quality liquid assets to cover expected net cash outflows over a 30-day liquidity stress period. The final standard was announced in January 2013 by the BCBS and, since January 2015, is being phased-in until 2019. Currently the banks to which this standard applies must comply with a minimum LCR requirement of 70% and gradually increase the ratio by 10 percentage points per year to reach 100% by January 2019.

The BCBS’s net stable funding ratio (“NSFR”) has a time horizon of one year and has been developed to provide a sustainable maturity structure of assets and liabilities such that banks maintain a stable funding profile in relation to their on- and off-balance sheet activities that reduces the likelihood that disruptions to a bank’s regular sources of funding will erode its liquidity position in a way that could increase the risk of its failure. The BCBS contemplates that the NSFR, including any revisions, will be implemented by member countries as a minimum standard by January 1, 2018, with no phase-in scheduled. The EU Banking Reforms propose the introduction of a harmonized binding requirement for the NSFR across the EU that will apply two years after the date of entry into force of the amending regulation at a level of 100%.

Various elements of the LCR and the NSFR, as they are implemented by national banking regulators and complied with by the Bank, may cause changes that affect the profitability of business activities and require changes to certain business practices, which could expose the Bank to additional costs (including increased compliance costs) or have a material adverse effect on the Bank’s business, financial condition or results of operations. These changes may also cause the Bank to invest significant management attention and resources to make any necessary changes.

 

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The Group’s businesses are subject to inherent risks concerning borrower and counterparty credit quality which have affected and are expected to continue to affect the recoverability and value of assets on the Group’s balance sheet

The Group has exposures to many different products, counterparties and obligors and the credit quality of its exposures can have a significant effect on the Group’s earnings. Adverse changes in the credit quality of the Group’s borrowers and counterparties or collateral, or in their behavior or businesses, may reduce the value of the Group’s assets, and materially increase the Group’s write-downs and provisions for impairment losses. Credit risk can be affected by a range of factors, including an adverse economic environment, reduced consumer and/or government spending, global economic slowdown, changes in the rating of individual counterparties, the debt levels of individual contractual counterparties and the economic environment they operate in, increased unemployment, reduced asset values, increased personal or corporate insolvency levels, reduced corporate profits, changes (and the timing, quantum and pace of these changes) in interest rates, counterparty challenges to the interpretation or validity of contractual arrangements and any external factors of a legislative or regulatory nature. In recent years, the global economic crisis has driven cyclically high bad debt charges.

Non-performing or low credit quality loans have in the past and can continue to negatively affect the Bank’s results of operations. The Bank cannot assure that it will be able to effectively control the level of the impaired loans in its total loan portfolio. At present, default rates are partly cushioned by low rates of interest which have improved customer affordability, but the risk remains of increased default rates as interest rates start to rise. The timing, quantum and pace of any rise is a key risk factor. All new lending is dependent on the Group’s assessment of each customer’s ability to pay, and there is an inherent risk that the Group has incorrectly assessed the credit quality or willingness of borrowers to pay, possibly as a result of incomplete or inaccurate disclosure by those borrowers or as a result of the inherent uncertainty that is involved in the exercise of constructing models to estimate the true risk of lending to counterparties. The Group estimates and establishes reserves for credit risks and potential credit losses inherent in its credit exposure. This process, which is critical to the Group’s results and financial condition, requires difficult, subjective and complex judgments, including forecasts of how macro-economic conditions might impair the ability of borrowers to repay their loans. As is the case with any such assessments, there is always a risk that the Group will fail to adequately identify the relevant factors or that it will fail to estimate accurately the effect of these identified factors, which could have a material adverse effect on the Group’s business, financial condition or results of operations.

The Group’s business is particularly vulnerable to volatility in interest rates

The Group’s results of operations are substantially dependent upon the level of its net interest income, which is the difference between interest income from interest-earning assets and interest expense on interest-bearing liabilities. Interest rates are highly sensitive to many factors beyond the Group’s control, including fiscal and monetary policies of governments and central banks, regulation of the financial sectors in the markets in which it operates, domestic and international economic and political conditions and other factors. Changes in market interest rates, including cases of negative reference rates, can affect the interest rates that the Group receives on its interest-earning assets differently to the rates that it pays for its interest-bearing liabilities. This may, in turn, result in a reduction of the net interest income the Group receives, which could have a material adverse effect on its results of operations.

In addition, the high proportion of loans referenced to variable interest rates makes debt service on such loans more vulnerable to changes in interest rates. In addition, a rise in interest rates could reduce the demand for credit and the Group’s ability to generate credit for its clients, as well as contribute to an increase in the credit default rate. As a result of these and the above factors, significant changes or volatility in interest rates could have a material adverse effect on the Group’s business, financial condition or results of operations.

 

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The Group has a substantial amount of commitments with personnel considered wholly unfunded due to the absence of qualifying plan assets

The Group’s commitments with personnel which are considered to be wholly unfunded are recognized under the heading “Provisions—Provisions for Pensions and Similar Obligations” in its consolidated balance sheets included in the Consolidated Financial Statements. For more information please see Note 25 to the Consolidated Financial Statements.

The Group faces liquidity risk in connection with its ability to make payments on its unfunded commitments with personnel, which it seeks to mitigate, with respect to post-employment benefits, by maintaining insurance contracts which were contracted with insurance companies owned by the Group. The insurance companies have recorded in their balance sheets specific assets (fixed interest deposit and bonds) assigned to the funding of these commitments. The insurance companies also manage derivatives (primarily swaps) to mitigate the interest rate risk in connection with the payments of these commitments. The Group seeks to mitigate liquidity risk with respect to early retirements and post-employment welfare benefits through oversight by the Assets and Liabilities Committee (“ALCO”) of the Group. The Group’s ALCO manages a specific asset portfolio to mitigate the liquidity risk resulting from the payments of these commitments. These assets are government and covered bonds which are issued at fixed interest rates with maturities matching the aforementioned commitments. The Group’s ALCO also manages derivatives (primarily swaps) to mitigate the interest rate risk in connection with the payments of these commitments. Should BBVA fail to adequately manage liquidity risk and interest rate risk either as described above or otherwise, it could have a material adverse effect on the Group’s business, financial condition and results of operations.

The Bank is dependent on its credit ratings and any reduction of its credit ratings could materially and adversely affect the Group’s business, financial condition and results of operations

The Bank is rated by various credit rating agencies. The Bank’s credit ratings are an assessment by rating agencies of its ability to pay its obligations when due. Any actual or anticipated decline in the Bank’s credit ratings to below investment grade or otherwise may increase the cost of and decrease the Group’s ability to finance itself in the capital markets, secured funding markets (by affecting its ability to replace downgraded assets with better-rated ones), or interbank markets, through wholesale deposits or otherwise, harm its reputation, require it to replace funding lost due to the downgrade, which may include the loss of customer deposits, and make third parties less willing to transact business with the Group or otherwise materially adversely affect its business, financial condition and results of operations. Furthermore, any decline in the Bank’s credit ratings to below investment grade or otherwise could breach certain agreements or trigger additional obligations under such agreements, such as a requirement to post additional collateral, which could materially adversely affect the Group’s business, financial condition and results of operations.

Highly-indebted households and corporations could endanger the Group’s asset quality and future revenues

In recent years, households and businesses have reached a high level of indebtedness, particularly in Spain, which has created increased risk in the Spanish banking system. In addition, the high proportion of loans referenced to variable interest rates makes debt service on such loans more vulnerable to upward movements in interest rates and the profitability of the loans more vulnerable to interest rate decreases. Highly indebted households and businesses are less likely to be able to service debt obligations as a result of adverse economic events, which could have an adverse effect on the Group’s loan portfolio and, as a result, on its financial condition and results of operations. Moreover, the increase in households’ and businesses’ indebtedness also limits their ability to incur additional debt, reducing the number of new products that the Group may otherwise be able to sell to them and limiting the Group’s ability to attract new customers who satisfy its credit standards, which could have an adverse effect on the Group’s ability to achieve its growth plans.

 

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The Group depends in part upon dividends and other funds from subsidiaries

Some of the Group’s operations are conducted through its financial services subsidiaries. As a result, the Bank’s ability to pay dividends, to the extent the Bank decides to do so, depends in part on the ability of the Group’s subsidiaries to generate earnings and to pay dividends to BBVA. Payment of dividends, distributions and advances by the Group’s subsidiaries will be contingent upon their earnings and business considerations and is or may be limited by legal, regulatory and contractual restrictions. For instance, the repatriation of dividends from the Group’s Venezuelan and Argentinean subsidiaries have been subject to certain restrictions and there is no assurance that further restrictions will not be imposed. Additionally, the Bank’s right to receive any assets of any of the Group’s subsidiaries as an equity holder of such subsidiaries upon their liquidation or reorganization will be effectively subordinated to the claims of subsidiaries’ creditors, including trade creditors. The Group also has to comply with increased capital requirements, which could result in the imposition of restrictions or prohibitions on discretionary payments including the payment of dividends (see “—Increasingly onerous capital requirements may have a material adverse effect on the Bank’s business, financial condition and results of operations”).

Business and Industry Risks

The Group faces increasing competition in its business lines

The markets in which the Group operates are highly competitive and this trend will likely continue with new business models likely to be developed in coming years which impact is unforeseeable. In addition, the trend towards consolidation in the banking industry has created larger and stronger banks with which the Group must now compete.

The Group also faces competition from non-bank competitors, such as payment platforms, e-commerce businesses, department stores (for some credit products), automotive finance corporations, leasing companies, factoring companies, mutual funds, pension funds, insurance companies, and public debt.

There can be no assurance that this competition will not adversely affect the Group’s business, financial condition and results of operations.

The Group faces risks related to its acquisitions and divestitures

The Group’s mergers and acquisitions activity involves divesting its interests in some businesses and strengthening other business areas through acquisitions. The Group may not complete these transactions in a timely manner, on a cost-effective basis or at all. Even though the Group reviews the companies it plans to acquire, it is generally not feasible for these reviews to be complete in all respects. As a result, the Group may assume unanticipated liabilities, or an acquisition may not perform as well as expected. In addition, transactions such as these are inherently risky because of the difficulties of integrating people, operations and technologies that may arise. There can be no assurance that any of the businesses the Group acquires can be successfully integrated or that they will perform well once integrated. Acquisitions may also lead to potential write-downs due to unforeseen business developments that may adversely affect the Group’s results of operations.

The Group’s results of operations could also be negatively affected by acquisition or divestiture-related charges, amortization of expenses related to intangibles and charges for impairment of long-term assets. The Group may be subject to litigation in connection with, or as a result of, acquisitions or divestitures, including claims from terminated employees, customers or third parties, and the Group may be liable for future or existing litigation and claims related to the acquired business or divestiture because either the Group is not indemnified for such claims or the indemnification is insufficient. These effects could cause the Group to incur significant expenses and could materially adversely affect its business, financial condition and results of operations.

 

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The Group is party to lawsuits, tax claims and other legal proceedings

Due to the nature of the Group’s business, the Bank and its subsidiaries are involved in litigation, arbitration and regulatory proceedings in jurisdictions around the world, the financial outcome of which is unpredictable, particularly where the claimants seek unspecified or undeterminable damages, or where the cases argue novel legal theories, involve a large number of parties or are at early stages of discovery. An adverse outcome or settlement in these proceedings could result in significant costs and may have a material adverse effect on the Group’s business, financial condition, cash flows, results of operations and reputation.

In addition, responding to the demands of litigation may divert management’s time and attention and financial resources. While the Group has provisioned such risks based on its assessment of such matters and in accordance with applicable accounting rules, it is possible that losses resulting from such risks, if proceedings are decided in whole or in part adversely to the Group, could exceed the amount of provisions made for such risks, which, in turn, could have a material adverse effect on the Group’s business, financial condition and results of operations. See “Item 8. Financial information—Consolidated Statements and Other Financial Information—Legal proceedings” and Note 24 to the Bank’s Consolidated Financial Statements for additional information on the Group’s legal, regulatory and arbitration proceedings.

The Group’s ability to maintain its competitive position depends significantly on its international operations, which expose the Group to foreign exchange, political and other risks in the countries in which it operates, which could cause an adverse effect on its business, financial condition and results of operations

The Group operates commercial banks and insurance and other financial services companies in various countries and its overall success as a global business depends upon its ability to succeed in differing economic, social and political conditions. The Group is particularly sensitive to developments in Mexico, the United States, Turkey and Argentina, which represented 12.63%, 11.42%, 11.61% and 1.25% of the Group’s assets as at December 31, 2016, respectively.

The Group is confronted with different legal and regulatory requirements in many of the jurisdictions in which it operates. See “— Legal, Regulatory and Compliance Risks—Local regulation may have a material effect on the Bank’s business, financial condition, results of operations and cash flows”. These include, but are not limited to, different tax regimes and laws relating to the repatriation of funds or nationalization or expropriation of assets. The Group’s international operations may also expose it to risks and challenges which its local competitors may not be required to face, such as exchange rate risk, difficulty in managing a local entity from abroad, political risk which may be particular to foreign investors and limitations on the distribution of dividends.

The Group’s presence in locations such as the Latin American markets or Turkey requires it to respond to rapid changes in market conditions in these countries and exposes the Group to increased risks relating to emerging markets. See “— Macroeconomic Risks—The Group may be materially adversely affected by developments in the emerging markets where it operates”. There can be no assurance that the Group will succeed in developing and implementing policies and strategies that are effective in each country in which it operates or that any of the foregoing factors will not have a material adverse effect on its business, financial condition and results of operations.

 

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Financial, Reporting and Other Operational Risks

Weaknesses or failures in the Group’s internal processes, systems and security could materially adversely affect its results of operations, financial condition or prospects, and could result in reputational damage

Operational risks, through inadequate or failed internal processes, systems (including financial reporting and risk monitoring processes) or security, or from people-related or external events, including the risk of fraud and other criminal acts carried out by Group employees or against Group companies, are present in the Group’s businesses. These businesses are dependent on processing and reporting accurately and efficiently a high volume of complex transactions across numerous and diverse products and services, in different currencies and subject to a number of different legal and regulatory regimes. Any weakness in these internal processes, systems or security could have an adverse effect on the Group’s results, the reporting of such results, and on the ability to deliver appropriate customer outcomes during the affected period. In addition, any breach in security of the Group’s systems could disrupt its business, result in the disclosure of confidential information and create significant financial and legal exposure for the Group. Although the Group devotes significant resources to maintain and regularly update its processes and systems that are designed to protect the security of its systems, software, networks and other technology assets, there is no assurance that all of its security measures will provide absolute security. Any damage to the Group’s reputation (including to customer confidence) arising from actual or perceived inadequacies, weaknesses or failures in its systems, processes or security could have a material adverse effect on its business, financial condition and results of operations.

The financial industry is increasingly dependent on information technology systems, which may fail, may not be adequate for the tasks at hand or may no longer be available

Banks and their activities are increasingly dependent on highly sophisticated information technology (“IT”) systems. IT systems are vulnerable to a number of problems, such as software or hardware malfunctions, computer viruses, hacking and physical damage to vital IT centers. IT systems need regular upgrading and banks, including the Bank, may not be able to implement necessary upgrades on a timely basis or upgrades may fail to function as planned. Furthermore, failure to protect financial industry operations from cyber-attacks could result in the loss or compromise of customer data or other sensitive information. These threats are increasingly sophisticated and there can be no assurance that banks will be able to prevent all breaches and other attacks on its IT systems. In addition to costs that may be incurred as a result of any failure of IT systems, banks, including the Bank, could face fines from bank regulators if they fail to comply with applicable banking or reporting regulations.

 

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BBVA’s financial statements and periodic disclosure under securities laws may not give you the same information as financial statements prepared under U.S. accounting rules and periodic disclosures provided by domestic U.S. issuers

Publicly available information about public companies in Spain is generally less detailed and not as frequently updated as the information that is regularly published by or about listed companies in the United States. In addition, although BBVA is subject to the periodic reporting requirements of the Exchange Act, the periodic disclosure required of foreign private issuers such as BBVA under the Exchange Act is more limited than the periodic disclosure required of U.S. issuers. Finally, BBVA maintains its financial accounts and records and prepares its financial statements in accordance with EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004 and in compliance with IFRS-IASB, which differs in certain respects from U.S. GAAP, the financial reporting standard to which many investors in the United States may be more accustomed.

The Bank’s financial statements are based in part on assumptions and estimates which, if inaccurate, could cause material misstatement of the results of its operations and financial position

The preparation of financial statements in accordance with IFRS-IASB requires the use of estimates. It also requires management to exercise judgment in applying relevant accounting policies. The key areas involving a higher degree of judgment or complexity, or areas where assumptions are significant to the consolidated and individual financial statements, include credit impairment charges for amortized cost assets, impairment and valuation of available-for-sale investments, calculation of income and deferred tax, fair value of financial instruments, valuation of goodwill and intangible assets, valuation of provisions and accounting for pensions and post-retirement benefits. There is a risk that if the judgment exercised or the estimates or assumptions used subsequently turn out to be incorrect then this could result in significant loss to the Group, beyond that anticipated or provided for, which could have an adverse effect on the Group’s business, financial condition and results of operations.

Observable market prices are not available for many of the financial assets and liabilities that the Group holds at fair value and a variety of techniques to estimate the fair value are used. Should the valuation of such financial assets or liabilities become observable, for example as a result of sales or trading in comparable assets or liabilities by third parties, this could result in a materially different valuation to the current carrying value in the Group’s financial statements.

The further development of standards and interpretations under IFRS-IASB could also significantly affect the results of operations, financial condition and prospects of the Group.

 

ITEM 4. INFORMATION ON THE COMPANY

A. History and Development of the Company

BBVA’s predecessor bank, BBV, was incorporated as a limited liability company (a “sociedad anónima” or S.A.) under the Spanish Corporations Law on October 1, 1988. BBVA was formed following the merger of Argentaria into BBV, which was approved by the shareholders of each entity on December 18, 1999 and registered on January 28, 2000. It conducts its business under the commercial name “BBVA”. BBVA is registered with the Commercial Registry of Vizcaya (Spain). It has its registered office at Plaza de San Nicolás 4, Bilbao, Spain, 48005, and operates out of Calle Azul, 4, 28050, Madrid, Spain telephone number +34-91-374-6201. BBVA’s agent in the U.S. for U.S. federal securities law purposes is Banco Bilbao Vizcaya Argentaria, S.A. New York Branch (1345 Avenue of the Americas, 44th Floor, New York, New York 10105 (Telephone: 212-728-1660)). BBVA is incorporated for an unlimited term.

 

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Capital Expenditures

Our principal investments are financial investments in our subsidiaries and affiliates. The main capital expenditures from 2014 to the date of this Annual Report were the following:

2017

On March 22, 2017, we acquired 41,790,000,000 shares (in the aggregate) of Garanti (amounting to 9.95% of the total issued share capital of Garanti) from Doğuş Holding A.Ş. and Doğuş Araştırma Geliştirme ve Müşavirlik Hizmetleri A.Ş., under certain agreements entered into on February 21, 2017, at a purchase price of 7.95 Turkish Liras (“TL”) per share (approximately 3,322 million TL or €859 million in the aggregate).

Following the completion of this acquisition, the shareholding structure of Garanti is approximately as follows:

 

     Shareholders’ stakes  

BBVA

     49.85

Doğuş Holding A.Ş.

     0.05

Rest

     50.10
  

 

 

 

Total

     100

2016

In 2016 there were no significant capital expenditures.

2015

Acquisition of an additional 14.89% of Garanti

On July 27, 2015, we acquired 62,538,000,000 shares (in the aggregate) of Garanti from Doğuş Holding A.Ş., Ferit Faik Şahenk, Dianne Şahenk and Defne Şahenk, under certain agreements entered into on November 19, 2014. The total price effectively paid by BBVA amounted to 8.765 TL per batch of 100 shares, amounting to approximately TL 5,481 million and €1,857 million applying a 2.9571 TL/EUR exchange rate.

Following this acquisition, we held 39.90% of Garanti’s share capital and started to fully consolidate Garanti’s results in our consolidated financial statements as we determined we were able to control such entity. On March 22, 2017, we completed the acquisition of an additional 9.95% stake in Garanti. See “— 2017” above.

In accordance with the IFRS-IASB accounting rules, at the date of achieving effective control over Garanti, BBVA had to measure at fair value its previously acquired stake of 25.01% in Garanti (classified as a joint venture accounted for under the equity method). This resulted in a negative impact in “Gains (losses) on derecognition of non-financial assets and subsidiaries, net” in the consolidated income statement of the BBVA Group for the year ended December 31, 2015, which resulted, in turn, in a net negative impact in the “Profit attributable to parent company” of the BBVA Group in 2015 amounting to €1,840 million. Such accounting impact did not result in any additional cash outflow from BBVA. Most of this impact resulted from the depreciation of the TL against the Euro since the acquisition by BBVA of such stake until the date of achieving such effective control.

 

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Acquisition of Catalunya Banc

On April 24, 2015, once the necessary authorizations had been obtained and all the agreed conditions precedent had been fulfilled, BBVA announced the acquisition of 1,947,166,809 shares of Catalunya Banc, S.A. (“Catalunya Banc”) (approximately 98.4% of its share capital) for a price of approximately €1,165 million.

Previously, on July 21, 2014, the Management Commission of the FROB had accepted BBVA’s bid in the competitive auction for the acquisition of Catalunya Banc.

2014

In 2014 there were no significant capital expenditures.

Capital Divestitures

Our principal divestitures are financial divestitures in our subsidiaries and in affiliates. The main capital divestitures from 2014 to the date of this Annual Report were the following:

2016

In 2016 there were no significant capital divestitures.

2015

Sale of the participation in Citic International Financial Holdings Limited (CIFH)

On December 23, 2014, the BBVA Group signed an agreement to sell its 29.68% participation in Citic International Financial Holdings Limited ( “CIFH”) to China CITIC Bank Corporation Limited (“CNCB”). CIFH is a non-listed subsidiary of CNCB domiciled in Hong Kong. On August 27, 2015, BBVA completed the sale of this participation. The selling price of HK$8,162 million was registered under “Profit or (-) loss from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations”.

Partial sale of China CITIC Bank Corporation Limited (CNCB)

On January 23, 2015, the BBVA Group signed an agreement to sell a 4.9% stake in CNCB to UBS AG, London Branch (UBS), which in turn entered into transactions pursuant to which such CNCB shares were to be transferred to a third party, with the ultimate economic benefit of ownership of such CNCB shares being transferred to Xinhu Zhongbao Co., Ltd (Xinhu) (collectively, the “Relevant Transactions”). On March 12, 2015, after having obtained the necessary approvals, BBVA completed the sale. The selling price to UBS was HK$5.73 per share, amounting to a total of HK$13,136 million, equivalent to approximately €1,555 million (with an exchange rate of €/HK$=8.45 as of the date of the closing).

In addition to the sale of this 4.9% stake, the BBVA Group made various sales of CNCB shares in the market during 2015. In total, a participation of 6.34% in CNCB was sold during 2015. The impact of these sales on the Consolidated Financial Statements of the BBVA Group was a gain, net of taxes, of approximately €705 million in 2015. This gain, gross of taxes, was recognized under “Profit or (-) loss from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations” in the consolidated income statement for 2015. See Note 50 to our Consolidated Financial Statements for additional information.

 

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2014

In 2014 there were no significant capital divestitures.

B. Business Overview

BBVA is a highly diversified international financial group, with strengths in the traditional banking businesses of retail banking, asset management, private banking and wholesale banking. We also have investments in some of Spain’s leading companies.

Operating Segments

Set forth below are the Group’s current seven operating segments:

 

    Banking Activity in Spain

 

    Real Estate Activity in Spain

 

    Turkey

 

    Rest of Eurasia

 

    Mexico

 

    South America

 

    United States

In addition to the operating segments referred to above, the Group has a Corporate Center which includes those items that have not been allocated to an operating segment. It includes the Group’s general management functions, including costs from central units that have a strictly corporate function; management of structural exchange rate positions carried out by the Financial Planning unit; specific issues of capital instruments to ensure adequate management of the Group’s overall capital position; proprietary portfolios such as holdings in some of Spain’s leading companies and their corresponding results; certain tax assets and liabilities; provisions related to commitments with pensioners; and goodwill and other intangibles. With respect to 2015, it also comprises the capital gains resulting from the sale of an aggregate 6.34% stake in CNCB, the effect of the valuation at fair value of the 25.01% initial stake held by BBVA in Garanti, the impact of the sale of BBVA’s 29.68% stake in CIFH and the negative goodwill generated from the acquisition of Catalunya Banc.

The information presented below as of and for the year ended December 31, 2014 has been recast to reflect our current operating segments (see “Presentation of Financial Information” and Note 6 to the Consolidated Financial Statements).

The breakdown of the Group’s total assets by operating segments as of December 31, 2016, 2015 and 2014 is as follows:

 

     As of December 31,  
     2016      2015      2014  
     (In Millions of Euros)  

Banking Activity in Spain

     332,642        339,775        318,431  

Real Estate Activity in Spain

     13,713        17,122        17,168  

Turkey (1)

     84,866        89,003        22,342  

Rest of Eurasia

     18,980        23,469        22,325  

Mexico

     93,318        99,594        93,834  

South America

     77,918        70,661        84,364  

United States

     88,902        86,454        69,261  

Subtotal Assets by Operating Segment

     710,339        726,079        627,765  
  

 

 

    

 

 

    

 

 

 

Corporate Center and other adjustments (2)

     21,517        23,776        4,177  
  

 

 

    

 

 

    

 

 

 

Total Assets BBVA Group

     731,856        749,855        631,942  
  

 

 

    

 

 

    

 

 

 

 

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(1)  The information as of December 31, 2014 is presented under management criteria, pursuant to which Garanti’s assets and liabilities have been proportionally integrated based on our 25.01% interest in Garanti as of such dates. See Note 3 to the Consolidated Financial Statements.
(2)  As of December 31, 2014, other adjustments include adjustments made to account for the fact that, in the Consolidated Financial Statements, Garanti was previously accounted for using the equity method until the acquisition of an additional 14.89% rather than using the management criteria referred to above. As of December 31, 2015, there were some adjustments related to the ALCO management between the Corporate Center and the operating segments.

The following table sets forth information relating to the profit (loss) attributable to parent company by each of BBVA’s operating segments and Corporate Center for the years ended December 31, 2016, 2015 and 2014:

 

     Profit/(Loss) Attributable to Parent
Company
    % of Profit/(Loss) Attributable to
Parent Company
 
     For the Year Ended December 31,  
     2016     2015(1)     2014(1)     2016     2015(1)     2014(1)  
     (In Millions of Euros)     (In Percentage)  

Banking Activity in Spain

     912       1,085       894       21.3       23.8       22.9  

Real Estate Activity in Spain

     (595     (496     (889     (13.9     (10.9     (22.8

Turkey (2)

     599       371       310       14.0       8.2       8.0  

Rest of Eurasia

     151       75       255       3.5       1.6       6.5  

Mexico

     1,980       2,094       1,903       46.3       46.0       48.7  

South America

     771       905       1,001       18.0       19.9       25.6  

United States

     459       517       428       10.7       11.4       11.1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal operating segments

     4,276       4,551       3,903       100.00       100.00       100.00  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Corporate Center

     (801     (1,910     (1,285      
  

 

 

   

 

 

   

 

 

       

Profit attributable to parent company

     3,475       2,642       2,618        
  

 

 

   

 

 

   

 

 

       

 

(1)  In the fourth quarter of 2015, certain operating expenses related to technology were reclassified from the Corporate Center to the Banking Activity in Spain segment. This reclassification was a consequence of the reassignment of technology-related management competences, resources and responsibilities from the Corporate Center to the Banking Activity in Spain segment during 2015. In our Consolidated Financial Statements and throughout this Annual Report, the comparative financial information by operating segment for 2014 has been retrospectively revised to reflect the reclassification of these expenses.
(2)  The information for the year ended December 31, 2014 and with respect to 2015, until July 2015, is presented under management criteria, pursuant to which Garanti’s results have been proportionally integrated based on our 25.01% interest in Garanti until July 2015, when the acquisition of an additional 14.89% stake in Garanti was completed and we started consolidating 100% of the Garanti group. See Note 3 to the Consolidated Financial Statements.

 

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The following table sets forth information relating to the income of each operating segment for the years ended December 31, 2016, 2015 and 2014 and reconciles the income statement of the various operating segments to the consolidated income statement of the Group:

 

     Operating Segments                            
     Banking
Activity
in Spain
     Real Estate
Activity in
Spain
    Turkey
(1)
     Rest of
Eurasia
     Mexico      South
America
     United
States
     Corporate
Center
    Total      Adjustments
(2) (4)
    BBVA
Group
 
     (In Millions of Euros)  

2016

                             

Net interest income

     3,883        60       3,404        166        5,126        2,930        1,953        (461     17,059        —         17,059  

Gross income

     6,445        (6     4,257        491        6,766        4,054        2,706        (60     24,653        —         24,653  

Net margin before provisions (3)

     2,846        (130     2,519        149        4,371        2,160        863        (916     11,862        —         11,862  

Operating profit /(loss) before tax

     1,278        (743     1,906        203        2,678        1,552        612        (1,094     6,392        —         6,392  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Profit

     912        (595     599        151        1,980        771        459        (801     3,475        —         3,475  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

2015

                             

Net interest income

     4,001        71       2,194        183        5,387        3,202        1,811        (424     16,426        (404     16,022  

Gross income

     6,804        (28     2,434        473        7,081        4,477        2,631        (192     23,680        (318     23,362  

Net margin before provisions (3)

     3,358        (154     1,273        121        4,459        2,498        825        (1,017     11,363        (109     11,254  

Operating profit /(loss) before tax

     1,548        (716     853        111        2,772        1,814        685        (1,187     5,879        (1,276     4,603  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Profit

     1,085        (496     371        75        2,094        905        517        (1,910     2,642        —         2,642  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

2014

                             

Net interest income

     3,830        (34     735        189        4,906        4,699        1,443        (651     15,116        (734     14,382  

Gross income

     6,621        (211     944        736        6,513        5,191        2,137        (575     21,356        (631     20,725  

Net margin before provisions (3)

     3,585        (357     550        393        4,100        2,875        640        (1,380     10,405        (240     10,166  

Operating profit /(loss) before tax

     1,272        (1,275     392        320        2,508        1,951        561        (1,666     4,063        (83     3,980  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Profit

     894        (889     310        255        1,903        1,001        428        (1,285     2,618        —         2,618  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) The information for the year ended December 31, 2014 and with respect to 2015, until July 2015, is presented under management criteria, pursuant to which Garanti’s results have been proportionally integrated based on our 25.01% interest in Garanti until July 2015, when the acquisition of an additional 14.89% stake in Garanti was completed and we started consolidating 100% of the Garanti group. See Note 3 to the Consolidated Financial Statements.
(2) Other adjustments include adjustments made to account for the fact that, until July 2015, in the Consolidated Financial Statements Garanti was accounted for using the equity method rather than using the management criteria referred to above.
(3) “Net margin before provisions” is calculated as “Gross income” less “Administration costs” and “Depreciation”.
(4) In the fourth quarter of 2015, certain operating expenses related to technology were reclassified from the Corporate Center to the Banking Activity in Spain segment. This reclassification was a consequence of the reassignment of technology-related management competences, resources and responsibilities from the Corporate Center to the Banking Activity in Spain segment during 2015. In our Consolidated Financial Statements and throughout this Annual Report, the comparative financial information by operating segment for 2014 has been retrospectively revised to reflect the reclassification of these expenses.

 

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The following tables set forth information relating to the balance sheet of the main operating segments as of December 31, 2016, 2015 and 2014:

 

     As of December 31,  
     2016  
     Banking
Activity
in Spain
     Turkey      Rest of
Eurasia
     Mexico      South
America
     United
States
 
     (In Millions of Euros)  

Total Assets

     332,642        84,866        18,980        93,318        77,918        88,902  

Loans and advances to customers

     187,313        57,941        15,709        47,938        50,333        62,000  

Of which:

                 

Residential mortgages

     81,659        6,135        2,432        8,410        11,441        12,913  

Consumer finance

     7,075        13,860        231        11,286        10,527        7,412  

Loans

     5,308        8,925        217        6,630        7,781        6,837  

Credit cards

     1,767        4,935        15        4,656        2,745        575  

Loans to enterprises

     43,418        32,732        12,340        18,684        21,495        32,864  

Loans to public sector

     18,262        —          57        3,862        685        4,594  

Total Liabilities

     321,887        75,798        17,579        89,244        73,425        84,719  

Customer deposits

     177,143        47,244        12,796        50,571        47,684        65,760  

Current and savings accounts

     98,949        9,515        4,442        31,112        23,369        49,430  

Time deposits

     67,097        33,096        8,174        7,048        20,509        13,765  

Other customer funds

     5,164        —          107        5,324        4,456        —    

Total Equity

     10,755        9,068        1,401        4,074        4,493        4,183  
     As of December 31,
2015
 
     Banking
Activity
in Spain
     Turkey      Rest of
Eurasia
     Mexico      South
America
     United
States
 
     (In Millions of Euros)  

Total Assets

     339,775        89,003        23,469        99,594        70,661        86,454  

Loans and advances to customers

     192,068        57,768        16,143        49,075        44,970        60,599  

Of which:

                 

Residential mortgages

     85,029        6,215        2,614        9,099        9,810        13,182  

Consumer finance

     6,126        14,156        322        11,588        9,278        7,364  

Loans

     4,499        9,010        305        6,550        6,774        6,784  

Credit cards

     1,627        5,146        17        5,037        2,504        580  

Loans to enterprises

     43,149        31,918        12,619        18,160        19,896        31,882  

Loans to public sector

     20,798        —          216        4,197        630        4,442  

Total Liabilities

     329,195        83,246        22,319        93,413        66,287        82,413  

Customer deposits

     185,471        47,148        15,053        49,553        41,998        63,715  

Current and savings accounts

     81,218        9,697        5,031        32,165        21,011        45,717  

Time deposits

     78,403        33,695        9,319        7,049        16,990        14,456  

Other customer funds

     14,906        —          609        5,738        4,031        —    

Total Equity

     10,581        5,757        1,150        6,181        4,374        4,041  

 

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     As of December 31,  
     2014  
     Banking
Activity
in Spain
     Turkey      Rest of
Eurasia
     Mexico      South
America
     United
States
 
     (In Millions of Euros)  

Total Assets

     318,431        22,342        22,325        93,874        84,364        69,261  

Loans and advances to customers

     174,201        13,635        15,795        46,829        52,920        49,667  

Of which:

                 

Residential mortgages

     74,508        1,413        2,779        9,272        9,622        11,876  

Consumer finance

     5,270        3,653        490        10,902        13,575        5,812  

Loans

     3,946        2,402        475        5,686        9,336        5,291  

Credit cards

     1,324        1,252        15        5,216        4,239        522  

Loans to enterprises

     37,224        7,442        11,119        16,707        20,846        25,202  

Loans to public sector

     22,833        —          234        4,295        650        3,706  

Total Liabilities

     309,216        21,839        19,138        45,937        78,395        66,052  

Customer deposits

     154,264        11,626        11,042        45,937        56,370        51,394  

Current and savings accounts

     61,437        2,151        3,221        28,014        35,268        38,863  

Time deposits

     70,521        7,860        7,341        28,014        16,340        11,231  

Other customer funds

     9,207        —          376        6,426        5,012        —    

Total Equity

     9,214        503        3,186        6,368        5,969        3,209  

Banking Activity in Spain

The Banking Activity in Spain operating segment includes all of BBVA’s banking and non-banking businesses in Spain, other than those included in the Corporate Center area and Real Estate Activity in Spain. The main business units included in this operating segment are:

 

    Spanish Retail Network: including individual customers, private banking, small companies and businesses in the domestic market;

 

    Corporate and Business Banking (CBB): which manages small and medium sized enterprises (“SMEs”), companies and corporations, public institutions and developer segments;

 

    Corporate and Investment Banking (C&IB): responsible for business with large corporations and multinational groups and the trading floor and distribution business in Spain; and

 

    Other units: which include the insurance business unit in Spain (BBVA Seguros), and the Asset Management unit, which manages Spanish mutual funds and pension funds.

 

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In addition, Banking Activity in Spain includes certain loans and advances portfolios, finance and structural euro balance sheet positions.

The following table sets forth information relating to the activity of this operating segment as of December 31, 2016, 2015 and 2014:

 

     As of December 31,  
     2016      2015      2014  
     (In Millions of Euros)  

Total Assets

     332,642        339,775        318,431  

Loans and advances to customers

     187,313        192,068        174,201  

Of which:

        

Residential mortgages

     81,659        85,029        74,508  

Consumer finance

     7,075        6,126        5,270  

Loans

     5,308        4,499        3,946  

Credit cards

     1,767        1,627        1,324  

Loans to enterprises

     43,418        43,149        37,224  

Loans to public sector

     18,262        20,798        22,833  

Customer deposits

     177,143        185,471        154,264  

Of which:

        

Current and savings accounts

     98,949        81,218        61,437  

Time deposits

     67,097        78,403        70,521  

Other customer funds

     5,164        14,906        9,207  

Assets under management

     56,147        54,504        50,497  

Of which:

        

Mutual funds

     32,648        31,484        28,444  

Pension funds

     23,448        22,897        21,879  

Other placements

     51        123        174  

Loans and advances to customers of this operating segment as of December 31, 2016 amounted to €187,313 million, a 2.5% decrease compared with the €192,068 million recorded as of December 31, 2015, mainly as a result of a €3,370 million decrease in residential mortgages and, to a lesser extent, due to a €2,535 million decrease in loans to the public sector, partially offset by a €2,505 million increase in repurchase agreements and other loans.

Customer deposits of this operating segment as of December 31, 2016 amounted to €177,143 million, a 4.5% decrease compared with the €185,471 million recorded as of December 31, 2015, mainly due to the decrease in time deposits, partially offset by an increase in current and saving accounts.

Mutual funds of this operating segment as of December 31, 2016 amounted to €32,648 million, a 3.7% increase compared with the €31,484 million recorded as of December 31, 2015. mainly as a result of increased activity during the year, encouraged by the low return on deposits and the improvement of markets. Pension funds of this operating segment as of December 31, 2016 amounted to €23,448 million, a 2.4% increase compared with the €22,897 million recorded as of December 31, 2015.

This operating segment’s non-performing asset ratio decreased to 5.8% as of December 31, 2016, from 6.6% as of December 31, 2015, mainly due to the improvement in credit quality, as well as due to a strong rate of recoveries during 2016. This operating segment’s non-performing assets coverage ratio decreased to 53.4% as of December 31, 2016, from 59.5% as of December 31, 2015.

 

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Real Estate Activity in Spain

This operating segment was set up with the aim of providing specialized and structured management of the real estate assets accumulated by the Group as a result of the economic crisis in Spain. It includes primarily lending to real estate developers and foreclosed real estate assets.

The Group’s exposure to the real estate sector in Spain, including loans and advances to customers and foreclosed assets, has declined over recent years. As of December 31, 2016, the balance stood at €10,307 million, 16.8% lower than as of December 31, 2015. Non-performing assets of this segment have continued to decline and as of December 31, 2016 were 12.4% lower than as of December 31, 2015. The coverage of non-performing and potential problem loans of this segment decreased to 59.4% as of December 31, 2016, compared with 63.4% as of December 31, 2015 of the total amount of real-estate assets in this operating segment.

The number of real estate assets sold amounted to 21,554 units in 2016, 2.2% higher than in 2015.

Turkey

This operating segment reflects BBVA’s stake in the Turkish bank Garanti. Following management criteria, assets and liabilities have been proportionally integrated based on our 25.01% interest in Garanti until July 2015, when we acquired an additional 14.89% and we began to fully consolidate the Garanti group. See “—History and Development of the Company—Capital expenditures—2017” for information on the new purchase agreement entered into with Doğuş Holding A.Ş. and Doğuş Araştirma Geliştirme ve Müşavirlik Hizmetleri A.Ş. on February 21, 2017.

The following table sets forth information relating to the business activity of this operating segment for the years ended December 31, 2016, 2015 and 2014:

 

     As of December 31,  
     2016      2015      2014  
     (In Millions of Euros)  

Total Assets

     84,866        89,003        22,342  

Loans and advances to customers

     57,941        57,768        13,635  

Of which:

        

Residential mortgages

     6,135        6,215        1,413  

Consumer finance

     13,860        14,156        3,653  

Loans

     8,925        9,010        2,402  

Credit cards

     4,935        5,146        1,252  

Loans to enterprises

     32,732        31,918        7,442  

Loans to public sector

     —          —          —    

Customer deposits

     47,244        47,148        11,626  

Of which:

        

Current and savings accounts

     9,515        9,697        2,151  

Time deposits

     33,096        33,695        7,860  

Assets under management

     3,753        3,620        882  

Of which:

        

Mutual funds

     1,192        1,243        344  

Pension funds

     2,561        2,378        538  

 

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During 2016, the Turkish lira depreciated against the euro in average terms from 3.0246 liras/€ in 2015 to 3.3427 liras/€ in 2016. In addition, there was a year-on-year depreciation of the Turkish lira from 3.1765 liras/€ as of December 31, 2015 to 3.7072 liras/€ as of December 31, 2016. The effect of these changes on exchange rates was negative for both the year-on-year comparison of the Group’s income statement and the year-on-year comparison of the Group’s balance sheet.

Loans and advances to customers of this operating segment as of December 31, 2016 amounted to €57,941 million, a 0.3% increase compared with the €57,768 million recorded as of December 31, 2015.

Customer deposits of this operating segment as of December 31, 2016 amounted to €47,244 million, a 0.2% increase compared with the €47,148 million recorded as of December 31, 2015.

Mutual funds of this operating segment as of December 31, 2016 amounted to €1,192 million, a 4.1% decrease compared with the €1,243 million recorded as of December 31, 2015, as a result of the depreciation of the Turkish lira. Excluding this impact, mutual funds of this operating segment increased 11.9% mainly due to the new agreement entered into with BlackRock for the management of foreign assets and other bilateral agreements which were signed with a number of distributors to actively market mutual funds. See “Item 5. Operating and Financial Review and Prospects—Operating Results—Factors Affecting the Comparability of our Results of Operations and Financial Condition—Trends in Exchange Rates” for an explanation on how we have excluded the impact of changes in exchange rates.

Pension funds of this operating segment as of December 31, 2016 amounted to €2,561 million, a 7.7% increase compared with the €2,378 million recorded as of December 31, 2015, as a result of the depreciation of the Turkish lira. Excluding this impact, pension funds in this operating segment increased 25.7% as a result of the positive performance.

This operating segment’s non-performing asset ratio decreased to 2.7% as of December 31, 2016 from 2.8% as of December 31, 2015. This operating segment’s non-performing assets coverage ratio decreased to 123.8% as of December 31, 2016 from 129.3% as of December 31, 2015.

Rest of Eurasia

This operating segment includes the retail and wholesale banking businesses carried out by the Group in Europe (primarily Portugal) and Asia, excluding Spain and Turkey.

The following table sets forth information relating to the business activity of this operating segment for the years ended December 31, 2016, 2015 and 2014:

 

     As of December 31,  
     2016      2015      2014  
     (In Millions of Euros)  

Total Assets

     18,980        23,469        22,325  

Loans and advances to customers

     15,709        16,143        15,795  

Of which:

        

Residential mortgages

     2,432        2,614        2,779  

Consumer finance

     231        322        490  

Loans

     217        305        475  

Credit cards

     15        17        15  

Loans to enterprises

     12,340        12,619        11,119  

Loans to public sector

     57        216        234  

Customer deposits

     12,796        15,053        11,042  

Of which:

        

Current and savings accounts

     4,442        5,031        3,224  

Time deposits

     8,174        9,319        7,341  

Other customer funds

     107        609        376  

Assets under management

     366        331        466  

Of which:

        

Mutual funds

     —          —          152  

Pension funds

     366        331        314  

 

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Loans and advances to customers of this operating segment as of December 31, 2016 amounted to €15,709 million, a 2.7% decrease compared with the €16,143 million recorded as of December 31, 2015, mainly as a result of the decrease in loans to companies and, to lesser extent, in loans to the public sector and in residential mortgages.

Customer deposits of this operating segment as of December 31, 2016 amounted to €12,796 million, a 15.0% decrease compared with the €15,053 million recorded as of December 31, 2015, mainly as a result of a decline in the number of branches in Europe.

Pension funds of this operating segment as of December 31, 2016 amounted to €366 million, a 10.5% increase compared with the €331 million recorded as of December 31, 2015, mainly as a result of a positive performance of the funds portfolio.

This operating segment’s non-performing assets ratio increased to 2.7% as of December 31, 2016 from 2.5% as of December 31, 2015. This operating segment’s non-performing assets coverage ratio decreased to 84.3%. as of December 31, 2016 from 96.4% as of December 31, 2015.

Mexico

The Mexico operating segment comprises the banking and insurance businesses conducted in Mexico by the BBVA Bancomer financial group.

The following table sets forth information relating to the business activity of this operating segment for the years ended December 31, 2016, 2015 and 2014:

 

     As of December 31,  
     2016      2015      2014  
     (In Millions of Euros)  

Total Assets

     93,318        99,594        93,874  

Loans and advances to customers

     47,938        49,075        46,829  

Of which:

        

Residential mortgages

     8,410        9,099        9,272  

Consumer finance

     11,286        11,588        10,902  

Loans

     6,630        6,550        5,686  

Credit cards

     4,656        5,037        5,216  

Loans to enterprises

     18,684        18,160        16,707  

Loans to public sector

     3,862        4,197        4,295  

Customer deposits

     50,571        49,553        45,937  

Of which:

        

Current and savings accounts

     31,112        32,165        28,014  

Time deposits

     7,048        7,049        6,426  

Other customer funds

     5,324        5,738        6,537  

Assets under management

     23,715        21,557        22,094  

Of which:

        

Mutual funds

     16,331        17,894        18,691  

Other placements

     7,384        3,663        3,403  

 

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The Mexican peso depreciated against the euro as of December 31, 2016 compared with December 31, 2015, negatively affecting the business activity of the Mexico operating segment as of December 31, 2016 expressed in euro. See Item 5. Operating and Financial Review and ProspectsOperating ResultsFactors Affecting the Comparability of our Results of Operations and Financial ConditionTrends in Exchange Rates.

Loans and advances to customers of this operating segment as of December 31, 2016 amounted to €47,938 million, a 2.3% decrease compared with the €49,075 million recorded as of December 31, 2015, mainly as a result of the impact of the depreciation of the Mexican peso (which had an estimated impact of approximately €3,945million). Excluding this impact, the change in loans and advances to customers was mainly due to an increase in loans to enterprises and, to a lesser extent, an increase in consumer loans, partially offset by a decrease in repurchase agreements and other loans.

Customer deposits of this operating segment as of December 31, 2016 amounted to €50,571 million, a 2.1% increase compared with the €49,553 million recorded as of December 31, 2015 mainly as a result of an overall increase in most product lines, partially offset by the impact of the depreciation of the Mexican peso.

Mutual funds of this operating segment as of December 31, 2016 amounted to €16,331 million, an 8.7% decrease compared with €17,894 million recorded as of December 31, 2015, mainly due to the depreciation of the Mexican peso. Excluding the impact of the depreciation of the Mexican peso there was an increase of 5.1%.

This operating segment’s non-performing assets ratio decreased to 2.3% as of December 31, 2016, from 2.6% as of December 31, 2015. This operating segment non-performing assets coverage ratio increased to 127% as of December 31, 2016, from 121% as of December 31, 2015.

South America

The South America operating segment includes the BBVA Group’s banking and insurance businesses in the region.

The business units included in the South America operating segment are:

 

    Retail and Corporate Banking: includes banks in Argentina, Chile, Colombia, Paraguay, Peru, Uruguay and Venezuela.

 

    Insurance: includes insurance businesses in Argentina, Chile, Colombia and Venezuela.

 

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The following table sets forth information relating to the business activity of this operating segment for the years ended December 31, 2016, 2015 and 2014:

 

     As of December 31,  
     2016      2015      2014  
     (In Millions of Euros)  

Total Assets

     77,918        70,661        84,364  

Loans and advances to customers

     50,333        44,970        52,920  

Of which:

        

Residential mortgages

     11,441        9,810        9,622  

Consumer finance

     10,527        9,278        13,575  

Loans

     7,781        6,774        9,336  

Credit cards

     2,745        2,504        4,239  

Loans to enterprises

     21,495        19,896        20,846  

Loans to public sector

     685        630        650  

Customer deposits

     47,684        41,998        56,370  

Of which:

        

Current and savings accounts

     23,369        21,011        35,268  

Time deposits

     20,509        16,990        16,340  

Other customer funds

     4,456        4,031        5,012  

Assets under management

     12,800        11,449        8,480  

Of which:

        

Mutual funds

     4,859        3,793        3,848  

Pension funds

     7,043        5,936        4,632  

The period-end exchange rate against the euro of the currencies of the countries in which the BBVA Group operates in South America decreased, on average, in 2016, compared with December 2015, negatively affecting the business activity in South America. The depreciation of the Venezuelan bolivar as of December 31, 2016 was particularly significant. See Item 5. Operating and Financial Review and ProspectsOperating ResultsFactors Affecting the Comparability of our Results of Operations and Financial ConditionTrends in Exchange Rates.

Loans and advances to customers of this operating segment as of December 31, 2016 amounted to €50,333 million, a 11.9% increase compared with the €44,970 million recorded as of December 31, 2015, mainly as a result of an increase in residential mortgages. By country, the largest increase was registered in Colombia, where the increase in loans and advances to customers were partially offset by a negative exchange rate effect.

Customer deposits of this operating segment as of December 31, 2016 amounted to €47,684 million, a 13.5% increase compared with the €41,998 million recorded as of December 31, 2015, mainly as a result of a positive performance in time deposits in Argentina and Colombia, partially offset by a negative exchange rate effect.

Mutual funds of this operating segment as of December 31, 2016 amounted to €4,859 million, a 28.1% increase compared with the €3,793 million recorded as of December 31, 2015, mainly due to the positive performance in Argentina, Chile and Peru, which was partially offset by the significant depreciation of the Venezuelan bolivar.

Pension funds in this operating segment as of December 31, 2016 amounted to €7,043 million, an 18.6% increase from the €5,936 million recorded as of December 31, 2015, mainly as a result of increased volumes in Bolivia.

 

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This operating segment’s non-performing assets ratio increased to 2.9% as of December 31, 2016, from 2.3% as of December 31, 2015, due to the weaker economic conditions in the region. This operating segment non-performing assets coverage ratio decreased to 103% as of December 31, 2016, from 123% as of December 31, 2015.

United States

This operating segment encompasses the Group’s business in the United States. BBVA Compass accounted for approximately 98% of the operating segment’s balance sheet as of December 31, 2016. Given its size in this segment, most of the comments below refer to BBVA Compass. This operating segment also includes the assets and liabilities of the BBVA office in New York, which specializes in transactions with large corporations.

The following table sets forth information relating to the business activity of this operating segment for the years ended December 31, 2016, 2015 and 2014:

 

     As of December 31,  
     2016      2015      2014  
     (In Millions of Euros)  

Total Assets

     88,902        86,454        69,261  

Loans and advances to customers

     62,000        60,599        49,667  

Of which:

        

Residential mortgages

     12,913        13,182        11,876  

Consumer finance

     7,412        7,364        5,812  

Loans

     6,837        6,784        5,291  

Credit cards

     575        580        522  

Loans to enterprises

     32,864        31,882        25,202  

Loans to public sector

     4,594        4,442        3,706  

Customer deposits

     65,760        63,715        51,394  

Of which:

        

Current and savings accounts

     49,430        45,717        38,863  

Time deposits

     13,765        14,456        11,231  

The U.S. dollar appreciated against the euro as of December 31, 2016 compared with December 31, 2015, positively affecting the business activity of the United States operating segment expressed in euro. See “Item 5. Operating and Financial Review and Prospects Operating ResultsFactors Affecting the Comparability of our Results of Operations and Financial ConditionTrends in Exchange Rates.

Loans and advances to customers of this operating segment as of December 31, 2016 amounted to €62,000 million, a 2.3% increase compared with the €60,599 million recorded as of December 31, 2015, mainly as a result of the impact of the appreciation of the U.S. dollar. Excluding this impact, loans and advances to customers fell due to a decrease in residential mortgages and in consumer loans.

Customer deposits of this operating segment as of December 31, 2016 amounted to €65,760 million, a 3.2% increase compared with the €63,715 million recorded as of December 31, 2015, mainly as a result of the impact of the appreciation of the U.S. dollar. Excluding this positive impact, customer deposits decreased mainly due to a reduction in time deposits, partially offset by an increase in current and savings accounts.

This operating segment’s non-performing assets ratio increased to 1.5% as of December 31, 2016, from 0.9% as of December 31, 2015. This operating segment non-performing assets coverage ratio decreased to 94% as of December 31, 2016, from 151% as of December 31, 2015, mainly as a result of improvements in the Energy portfolio and by customers related to the oil and gas industry.

 

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Insurance Activity

See Note 23 to our Consolidated Financial Statements for information on our insurance activity.

Monetary Policy

The integration of Spain into the European Monetary Union (“EMU”) on January 1, 1999 implied the yielding of monetary policy sovereignty to the Eurosystem. The “Eurosystem” is composed of the ECB and the national central banks of the 19 member countries that form the EMU.

The Eurosystem determines and executes the policy for the single monetary union of the 19 member countries of the EMU. The Eurosystem collaborates with the central banks of member countries to take advantage of the experience of the central banks in each of its national markets. The basic tasks carried out by the Eurosystem include:

 

    defining and implementing the single monetary policy of the EMU;

 

    conducting foreign exchange operations in accordance with the set exchange policy;

 

    lending to national monetary financial institutions in collateralized operations;

 

    holding and managing the official foreign reserves of the member states; and

 

    promoting the smooth operation of the payment systems.

In addition, the Treaty on the EU (“EU Treaty”) establishes a series of rules designed to safeguard the independence of the system, in its institutional as well as its administrative functions.

Supervision and Regulation

Since September 2012, significant progress has been made toward the establishment of a European banking union. Banking union is expected to be achieved through new harmonized banking rules (the single rulebook) and a new institutional framework with stronger systems for both banking supervision and resolution that will be managed at the European level. Its two main pillars are the SSM and the SRM. As a further step to a fully-fledged banking union, in November 2015, the European Commission put forward a proposal for a European Deposit Insurance Scheme (EDIS), which intends to provide a stronger and more uniform degree of insurance cover for all retail depositors in the banking union.

Pursuant to Article 127(6) of the Treaty on the Functioning of the EU and the SSM Framework Regulation, the ECB is responsible for specific tasks concerning the prudential supervision of credit institutions established in participating Member States. Since 2014, it carries out these supervisory tasks within the SSM framework, composed of the ECB and the relevant national authorities. The ECB is responsible for the effective and consistent functioning of the SSM, with a view to carrying out effective banking supervision, contributing to the safety and soundness of the banking system and the stability of the financial system.

Its main aims are to:

 

    ensure the safety and soundness of the European banking system;

 

    increase financial integration and stability; and

 

    ensure consistent supervision.

The ECB, in cooperation with the relevant national supervisors, is responsible for the effective and consistent functioning of the SSM.

 

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It has the authority to:

 

    conduct supervisory reviews, on-site inspections and investigations;

 

    grant or withdraw banking licenses;

 

    assess banks’ acquisitions and disposals of qualifying holdings;

 

    ensure compliance with EU prudential rules; and

 

    set higher capital requirements (“buffers”) in order to counter any financial risks.

In addition, since November 2014, it assumed the direct supervision of the 123 significant banks of the participating countries, including Banco Bilbao Vizcaya Argentaria, S.A. These banks hold almost 82% of banking assets in the Eurozone. Ongoing supervision of the significant banks is carried out by Joint Supervisory Teams (“JSTs”). Each significant bank has a dedicated JST, comprising staff of the ECB and the relevant national supervisors (in our case, the Bank of Spain).

The criteria for determining whether a bank is considered significant (and therefore whether it falls under the ECB’s direct supervision) are set out in the SSM Framework Regulation and the Regulation (EU) No. 468/2014 of the European Central Bank of April 16, 2014 establishing the framework for cooperation within the SSM between the European Central Bank and national competent authorities and with national designated authorities (the “SSM Framework Regulation”). To qualify as significant, a bank must fulfill at least one of these criteria:

 

    size: the total value of its assets exceeds €30 billion;

 

    economic importance: for the specific country or the EU economy as a whole;

 

    cross border activities: the total value of its assets exceeds €5 billion and the ratio of its cross-border assets/liabilities in more than one other participating Member State to its total assets/liabilities is above 20%; or

 

    direct public financial assistance: it has requested or received funding from the European Stability Mechanism (the “ESM”) or the European Financial Stability Facility.

The ECB can decide at any time to classify a bank as significant to ensure that high supervisory standards are applied consistently.

The ECB indirectly supervises banks that are not considered significant (also known as “less significant” institutions), which continue to be supervised by their national supervisors, in close cooperation with the ECB. See “—Bank of Spain” below for an explanation of the tasks to be performed by the Bank of Spain.

Bank of Spain

The Bank of Spain was established in 1962 as a public law entity (entidad de derecho público) that operates as Spain’s autonomous central bank. In addition, it has the ability to function as a private bank. Except in its public functions, the Bank of Spain’s relations with third parties are governed by private law, and its actions are subject to the civil and business law codes and regulations.

Until January 1, 1999, the Bank of Spain was also the sole entity responsible for implementing Spanish monetary policy. For a description of monetary policy since the introduction of the euro, see “—Monetary Policy”.

Since January 1, 1999, the Bank of Spain has performed the following basic functions attributed to the Eurosystem:

 

    defining and implementing the Eurosystem’s monetary policy, with the principal aim of maintaining price stability across the Eurozone;

 

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    conducting currency exchange operations consistent with the provisions of Article 219 of the EU Treaty, and holding and managing the Member States’ official currency reserves;

 

    promoting the sound working of payment systems in the Eurozone; and

 

    issuing legal tender banknotes.

Recognizing the foregoing functions as a fully-fledged member of the Eurosystem, the Bank of Spain Law of Autonomy (Ley de Autonomía del Banco de España) stipulates the performance of the following functions by the Bank of Spain:

 

    holding and managing currency and precious metal reserves not transferred to the ECB;

 

    promoting the proper working and stability of the financial system and, without prejudice to the functions of the ECB, the proper working of the national payment systems, providing emergency liquidity assistance (ELA);

 

    promoting the sound working and stability of the financial system and, without prejudice to the functions of the ECB, of national payment systems;

 

    placing coins in circulation and the performance, on behalf of the State, of all such other functions entrusted to it in this connection;

 

    preparing and publishing statistics relating to its functions, and assisting the ECB in the compilation of the necessary statistical information;

 

    providing treasury services and acting as financial agent for government debt;

 

    advising the government, preparing the appropriate reports and studies; and

 

    exercising all other powers attributed to it by legislation.

As indicated above, on November 4, 2014 the ECB assumed responsibility for the supervision of Eurozone banks, following a year-long preparatory phase that included an in-depth examination of the resilience and balance sheets of the largest banks in the Eurozone. For all the banks not supervised directly by the ECB, around 3,500 banks, the ECB will also set and monitor the relevant supervisory standards and work closely with the national competent authorities in the supervision of these banks.

The ECB has set up homogenous criteria for all the supervised institutions under the SSM and has assumed decision-making power. National authorities, such as the Bank of Spain, provide their knowledge on their financial systems and the entities located in their jurisdictions. Therefore, the role of the Bank of Spain continues to be relevant for financial entities located in Spain. In particular, the Bank of Spain’s tasks include the following:

 

    it collaborates with the ECB in the supervision of significant entities through its participation in the JSTs of the relevant Spanish banks, and has a leading role in the on-site inspections;

 

    the Bank of Spain supervises directly the less significant Spanish banks. The ECB’s indirect supervision of these entities is focused on the homogenization of supervisory criteria and reception of information;

 

    there are several supervisory competences over banking entities, for example money laundering and terrorist financing, customer protection and certain aspects of the monitoring of the financial markets that are out of the scope of the SSM and remain under the purview of the Bank of Spain;

 

    the Bank of Spain participates in certain administrative processes controlled by the ECB, such as the granting or withdrawal of licenses and the application of fit and proper tests to members of the board and senior management of Spanish banks, and supports the ECB in cross-border tasks such as the definition of policies, methodologies or crisis management;

 

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    the Bank of Spain continues to supervise other institution such as appraisal companies or specialist credit institutions, e-money issuing entities, mutual guarantee and re-guarantee companies; and

 

    the Bank of Spain participates in the governing bodies of the SSM contributing to the adoption of decisions affecting all credit institutions located in the Eurozone.

Single Resolution Fund

The Single Resolution Fund (the “Fund”) was established pursuant to Regulation (EU) No 806/2014 as a single financing arrangement for all the Member States participating in the SSM.

The Fund should be used in resolution procedures where the Single Resolution Board (“SRB”) considers it necessary to ensure the effective application of the resolution tools. The Fund should have adequate financial resources to allow for an effective functioning of the resolution framework by being able to intervene, where necessary, for the effective application of the resolution tools and to protect financial stability without recourse to taxpayers’ money.

The SRB should calculate the annual contributions to the Fund on the basis of a single target level established as 1% of the amount of covered deposits of all of the credit institutions authorized in all of the participating Member States. The SRB should ensure that the available financial means of the Fund reach at least the target level by the end of an initial period of eight years from January 1, 2016. The annual contribution to the Fund should be based on a flat contribution determined on the basis of an institution’s liabilities excluding own funds and covered deposits and a risk-adjusted contribution depending on the risk profile of that institution.

Deposit Guarantee Fund of Credit Institutions

The Deposit Guarantee Fund of Credit Institutions (Fondo de Garantía de Depósitos or “FGD”), which operates under the guidance of the Bank of Spain, was set up by virtue of Royal Decree-Law 16/2011, of October 14. It is an independent legal entity and enjoys full authority to fulfill its functions. Royal Decree-Law 16/2011 unified the three previous guarantee funds that existed in Spain: the Deposit Guarantee Fund of Saving Banks, the Deposit Guarantee Fund of Credit Entities and the Deposit Guarantee Fund of Banking Establishments.

The main objective of the FGD is to guarantee deposits and securities held by credit institutions, up to the limit of €100,000. It also has the authority to carry out any such actions necessary to reinforce the solvency and operation of credit institutions in difficulty, with the purpose of defending the interests of depositors and deposit guarantee funds.

In order to fulfill its purposes, the FGD receives annual contributions from member credit institutions. The current annual contribution requirement is €2 for every €1,000 guaranteed deposits held by the respective member institution as of year-end. The Minister of the Economy and Finance is authorized to reduce the contributions when the FGD’s equity is considered sufficient to meet its needs. Moreover, it may suspend contributions when the FGD’s total equity reaches 1% of the calculation base of the contributions of the member institutions as a whole. Under certain circumstances defined by law, there may be extraordinary contributions from the institutions, and the European Central Bank may also require exceptional contributions of an amount set by law.

As of December 31, 2016, 2015 and 2014 all of the Spanish banks belonging to the BBVA Group were members of the FGD and were thus obligated to make annual contributions to it.

Investment Guarantee Fund

Royal Decree 948/2001, of August 3, regulates investor guarantee schemes (Fondo de Garantía de Inversores) related to both investment firms and to credit institutions. These schemes are set up through an investment guarantee fund for securities broker and broker-dealer firms and the deposit guarantee funds already in place for credit institutions. A series of specific regulations have also been enacted, defining the system for contributing to the funds.

 

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The General Investment Guarantee Fund Management Company was created in a relatively short period of time and is a business corporation with capital in which all the fund members hold an interest. Member firms must make a joint annual contribution to the fund equal to 0.06% over the 5% of the securities that they hold on their client’s behalf. However, it is foreseen that these contributions may be reduced if the fund reaches a level considered to be sufficient.

Liquidity Requirements – Minimum Reserve Ratio

The legal framework for the minimum reserve ratio is set out in Regulation (EC) No. 2818/98 of the ECB of December 1, 1998 on the application of minimum reserves (ECB/1998/15). The reserve coefficient for overnight deposits, deposits with agreed maturity or period of notice up to two years, debt securities issued with maturity up to two years and money market paper is 1%. For deposits with agreed maturity or period of notice over two years, repos and debt securities issued with maturity over two years there is no required reserve coefficient.

Investment Ratio

In the past, the government used the investment ratio to allocate funds among specific sectors or investments. As part of the liberalization of the Spanish economy, it was gradually reduced to a rate of zero percent as of December 31, 1992. However, the law that established the ratio has not been abolished and the government could re-impose the ratio, subject to applicable EU requirements.

Capital Requirements

In December 2010, the Basel Committee on Banking Supervision (the “Basel Committee”) proposed a number of fundamental reforms to the regulatory capital framework for internationally active banks (the “Basel III capital reforms”). The Basel III capital reforms raised the quantity and quality of capital required to be held by a financial institution with an emphasis on Common Equity Tier 1 capital (the “CET1 capital”) and introduced an additional requirement for both a capital conservation buffer and a countercyclical buffer to be met with CET1 capital.

As a Spanish credit institution, we are subject to the CRD IV Directive, through which the EU began implementing the Basel III capital reforms, with effect from January 1, 2014, with certain requirements in the process of being phased in until January 1, 2019. The core regulation regarding the solvency of credit entities is the CRR, which is complemented by several binding regulatory technical standards, all of which are directly applicable in all EU Member States, without the need for national implementation measures. The implementation of CRD IV Directive into Spanish law has taken place through RD-L 14/2013, Law 10/2014, RD 84/2015, Bank of Spain Circular 2/2014 and Bank of Spain Circular 2/2016. On November 23, 2016, the European Commission published a package of proposals, the EU Banking Reforms, including measures to increase the resilience of EU institutions and enhance financial stability.

Among other things, CRD IV established minimum “Pillar 1” capital requirements both on a consolidated and individual basis (which includes a CET1 capital ratio of 4.5%, a Tier 1 capital ratio of 6% and a total capital ratio of 8% of risk-weighted assets). Additionally, CRD IV increased the level of capital required by means of a “combined buffer requirement” that entities must comply with from 2016 onwards. The “combined buffer requirement” has introduced five new capital buffers: (i) the capital conservation buffer, (ii) the G-SIB buffer, (iii) the institution-specific countercyclical buffer, (iv) the D-SIB buffer and (v) the systemic risk buffer. The “combined buffer requirement” applies in addition to the minimum “Pillar 1” capital requirements and is required to be satisfied with CET1 capital.

The combination of the capital conservation buffer, the institution-specific countercyclical buffer and the higher of (depending on the institution) the systemic risk buffer, the G-SIB buffer and the D-SIB buffer, in each case (if applicable to the relevant institution—in the event that the systemic risk buffer only applies to local exposures, such buffer is added to the higher of the G-SIB buffer or the D-SIB buffer) is referred to as the “combined buffer requirement”. This “combined buffer requirement” is in addition to the “Pillar 1” and the “Pillar 2” capital requirements and is required to be satisfied with CET1 capital.

 

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The G-SIB buffer applies to those institutions included on the list of G-SIBs, which is updated annually by the FSB. We have been excluded from this list with effect from January 1, 2017 and so, unless otherwise indicated by the FSB (or the Bank of Spain) in the future, we will not be required to maintain a G-SIB buffer any longer.

The Bank of Spain announced on November 7, 2016 that we will continue to be considered a D-SIB, and consequently we will be required to maintain during 2017 a D-SIB buffer of a CET1 capital ratio of 0.75% on a consolidated basis. The D-SIB buffer is being phased-in from January 1, 2016 to January 1, 2019, and the D-SIB buffer applicable to BBVA for 2017 is a CET1 capital ratio of 0.375% on a consolidated basis.

Moreover, Article 104 of the CRD IV Directive, as implemented by Article 68 of Law 10/2014, and similarly Article 16 of the SSM Framework Regulation, also contemplate that in addition to the minimum “Pillar 1” capital requirements and the combined buffer requirements, supervisory authorities may impose (above “Pillar 1” requirements and below the combined buffer requirements) further “Pillar 2” capital requirements to cover other risks, including those not considered to be fully captured by the minimum “own funds” “Pillar 1” requirements under CRD IV or to address macro-prudential considerations.

Accordingly, any additional “Pillar 2” own funds requirement that may be imposed on us and/or the Group by the ECB pursuant to the SREP will require us and/or the Group to hold capital levels in addition to the ones required by the “Pillar 1” capital requirements and the combined buffer requirements.

As a result of the most recent SREP carried out by the ECB in 2016, we have been informed by the ECB that, effective from January 1, 2017, we are required to maintain (i) a CET1 phased-in capital ratio of 7.625% (on a consolidated basis) and 7.25% (on an individual basis); and (ii) a phased-in total capital ratio of 11.125% (on a consolidated basis) and 10.75% (on an individual basis).

This phased-in total capital ratio of 11.125% on a consolidated basis includes (i) the minimum CET1 capital ratio required under “Pillar 1” (4.5%); (ii) the “Pillar 1” Additional Tier 1 capital requirement (1.5%); (iii) the “Pillar 1” Tier 2 capital requirement (2%); (iv) the additional CET1 capital requirement under “Pillar 2” (1.5%); (v) the capital conservation buffer (1.25% CET1); and (vi) the D-SIB buffer (0.375% CET1).

According to Article 48 of Law 10/2014, Article 73 of RD 84/2015 and Rule 24 of Bank of Spain Circular 2/2016, any entity not meeting its “combined buffer requirement” is required to determine its MDA as described therein. Until the MDA has been calculated and communicated to the Bank of Spain, where applicable, the relevant entity will be subject to restrictions on (i) distributions relating to CET1 capital, (ii) payments in respect of variable remuneration or discretionary pension revenues and (iii) distributions relating to Additional Tier 1 Instruments (“discretionary payments”) and, thereafter, any such discretionary payments by that entity will be subject to such MDA limit. Furthermore, as set forth in Article 48 of Law 10/2014, the adoption by the Bank of Spain of the measures prescribed in Articles 68.2.h) and 68.2.i) of Law 10/2014, aimed at strengthening own funds or limiting or prohibiting the distribution of dividends respectively will also restrict the discretionary payments to such MDA. See “Item 3 Key Information —Risk Factors—Legal, Regulatory and Compliance Risks–Increasingly onerous capital requirements may have a material adverse effect on the Bank’s business, financial condition and results of operations” for additional information.

Capital Management

Basel Capital Accord - Economic Capital

The Group’s capital management is performed at both the regulatory and economic levels.

Regulatory capital management is based on the analysis of the capital base and the capital ratios (core capital, Tier 1, etc.) using Basel (“BIS”) and the CRR. See Note 32 to the Consolidated Financial Statements.

The aim is to achieve a capital structure that is as efficient as possible in terms of both cost and compliance with the requirements of regulators, ratings agencies and investors. Active capital management includes securitizations, sales of assets, and preferred and subordinated issues of equity and hybrid instruments. In recent years we have taken various actions in connection with our capital management and in order to comply with various capital requirements applicable to us. We may make securities issuances or undertake asset sales in the future, which could

 

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involve outright sales of businesses or reductions in interests held by us, which could be material and could be undertaken at less than their respective book values, resulting in material losses thereon, in connection with our capital management and in order to comply with capital requirements or otherwise.

The Bank has obtained the Bank of Spain’s approval with respect to its internal model of capital estimation (“IRB”) concerning certain portfolios and its operational risk internal model.

From an economic standpoint, capital management seeks to optimize value creation at the Group and at its different business units.

The Group allocates economic capital (“CER”) commensurate with the risks incurred by each business. This is based on the concept of unexpected loss at a certain level of statistical confidence, depending on the Group’s targets in terms of capital adequacy. The CER calculation combines lending risk, market risk (including structural risk associated with the balance sheet and equity positions), operational risk and fixed asset and technical risks in the case of insurance companies.

Stockholders’ equity, as calculated under BIS rules, is an important metric for the Group. However, for the purpose of allocating capital to operating segments the Group prefers CER. It is risk-sensitive and thus better reflects management policies for the individual businesses and the business portfolio. These provide an equitable basis for assigning capital to businesses according to the risks incurred and make it easier to compare returns.

To internal effects of management and pursuit of the operating segments, the Group realizes a capital allocation to each operating segment.

Concentration of Risk

The Bank of Spain regulates the concentration of risk. Since January 1, 1999, any exposure to a person or group exceeding 10% of a group’s or bank’s regulatory capital has been deemed a concentration. The total amount of exposure represented by all of such concentrations may not exceed 800% of regulatory capital. Exposure to a single person or group may not exceed 25% (20% in the case of non-consolidated companies of the economic group) of a bank’s or group’s regulatory capital.

Legal and Other Restricted Reserves

We are subject to the legal and other restricted reserves requirements applicable to Spanish companies. Please see “—Capital Requirements”.

Impairment on Financial Assets

For a discussion of provisions for loan losses and country risk, see Note 2.2.1 to the Consolidated Financial Statements.

Regulation of the Disclosure of Fees and Interest Rates

Banks must publish their preferential rates, rates applied on overdrafts, and fees and commissions charged in connection with banking transactions. Banking clients must be provided with written disclosure adequate to permit customers to ascertain transaction costs. The foregoing regulations are enforced by the Bank of Spain in response to bank client complaints.

Law 44/2002, of November 22, concerning measures to reform the Spanish financial system, contained a rule concerning the calculation of variable interest applicable to loans and credit secured by mortgages, bails, pledges or any other equivalent guarantee.

 

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Employee Pension Plans

Under the relevant collective labor agreements, BBVA and some of its subsidiaries provide supplemental pension payments to certain active and retired employees and their beneficiaries. These payments supplement social security benefits from the Spanish state. See Note 2.2.12 and Note 25 to the Consolidated Financial Statements.

Dividends

A bank may generally dedicate all of its net profits and its distributable reserves to the payment of dividends. In no event may dividends be paid from non-distributable reserves. For additional information see “Item 8. Financial Information—Consolidated Statements and Other Financial Information—Dividends”.

Although banks are not legally required to seek prior approval from the Bank of Spain or the ECB before declaring interim dividends, we inform them on a voluntary basis upon the declaration of an interim dividend. It should be noted that the ECB recommendation dated December 13, 2016 addressed to, among others, significant supervised entities and significant supervised groups, such as BBVA and its Group, recommends credit institutions to establish dividend policies using conservative and prudent assumptions so that, after any such distribution, they are able to satisfy the applicable capital requirements and any other requirements resulting from the supervisory review and evaluation process (SREP).

Since January 1, 2016, according to CRD IV, those credit entities required to calculate their MDA will be subject to restrictions on discretionary payments, which includes, among others, dividend payments. See “—Capital Requirements”.

Our Bylaws allow for dividends to be paid in cash or in kind as determined by shareholders’ resolution.

Scrip Dividend

As in 2011, 2012, 2013, 2014 and 2015, during 2016 a scrip dividend scheme called “Dividend Option” was approved by the annual general meeting of shareholders held on March 11, 2016. The BBVA annual general meeting of shareholders held on March 17, 2017 passed one resolution adopting a capital increase to be charged to voluntary reserves for the implementation of a “Dividend Option” in 2017. This resolution allows BBVA to implement, depending on the results of BBVA, the market conditions, the regulatory framework and the recommendations regarding dividends that may be adopted, one “Dividend Option” during 2017.

Upon the execution of such capital increase to be charged to voluntary reserves, BBVA shareholders will have the option, at their own free choice, to receive all or part of their remuneration in newly issued ordinary shares of BBVA or in cash. For additional information on the “Dividend Option” scheme, including its tax implications, see “Item 10. Additional Information—Taxation—Spanish Tax Considerations—Taxation of Dividends—Scrip Dividend” and “Item 10. Additional Information—Taxation—U.S. Tax Considerations—Taxation of Distributions”.

The “Dividend Option” is implemented as an alternative remuneration scheme for BBVA shareholders with the aim to provide BBVA shareholders with a flexible option to receive all or part of their remuneration in newly issued ordinary shares of the Bank, whilst always maintaining the possibility to choose to receive the entire remuneration in cash.

BBVA’s Board of Directors, at its March 17, 2017 meeting, approved the execution of the capital increase approved by the BBVA annual general meeting of shareholders held on March 17, 2017 in connection with the implementation of a “Dividend Option” on the terms provided therein. The maximum number of new ordinary shares that may be issued as a consequence of the execution of the capital increase is 121,603,985 which is expected to become effective on April 26, 2017.

Limitations on Types of Business

Spanish banks are subject to certain limitations on the types of businesses in which they may engage directly, but they are subject to few limitations on the types of businesses in which they may engage indirectly.

 

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Mortgage Legislation

Law 2/1981, of March 25, on mortgage market, as amended by Law 41/2007, regulates the different aspects of the Spanish mortgage market and establishes additional rules for the mortgage and financial system.

Royal Decree 716/2009, of April 24, implemented several aspects of Law 2/1981, of March 25. The most significant aspect implemented by Royal Decree 716/2009 was the modification on the loan-to-value ratio requirement intending to improve the quality of Spanish mortgage-backed securities.

Increasing social pressure for the reform of mortgage legislation in Spain has resulted in changes to such legislation, which are described below.

Royal Decree 6/2012, of March 9, on urgent measures to protect mortgage debtors without financial resources introduced measures to enable the restructuring of mortgage debt and easing of collateral foreclosure aimed to protect especially vulnerable debtors.

Such measures include the following:

 

    the moderation of interest rates charged on mortgage arrears;

 

    the improvement of extrajudicial procedures as an alternative to legal foreclosure;

 

    the introduction of a voluntary code of conduct among lenders for regulated mortgage debt restructuring affecting especially vulnerable debtors; and

 

    where restructuring is unviable, lenders may, where appropriate and on an optional basis, offer the debtor partial debt forgiveness.

In addition, Royal Decree 27/2012, of November 15, on urgent measures to enhance the protection of mortgage debtors provided for a two-year moratorium, from the date of its adoption, on evictions applicable to debtor groups especially susceptible to social exclusion, which may remain at their homes for such period.

Law 1/2013, of May 14, on measures to protect mortgagees, debt restructuring and social rents, introduced important modifications to mortgage law and civil procedure law. The most relevant modifications are:

 

    extension of the two-year moratorium, established by Royal Decree 27/2012, until May 15, 2015;

 

    broadening the potential beneficiaries of the moratorium of Royal Decree 6/2012;

 

    limitation of the interest rates applied for delay or arrears;

 

    in the context of an auction, the base value of the property shall be the value set forth in the relevant mortgage deed and in no case shall it be less than 75% of the official appraisal value of the property;

 

    the possibility of suspension of enforcement proceedings when the loan or credit facility secured by the mortgage contains abusive clauses; and

 

    modification of the out-of-court notarial procedure.

Royal Decree 11/2014, following the judgment of the EU Court of Justice of July 17, 2014 regarding Spanish foreclosure processes, allows debtors to appeal against a court’s resolution which rejects his or her opposition to the execution of a mortgage.

The Mortgage Credit Directive 2014/17/EU on credit agreements for consumers relating to residential immovable property was adopted on February 4, 2014. This Directive aims to create a Union-wide mortgage credit market with a high level of consumer protection. It applies to both secured credit and home loans. Member States will have to transpose its provisions into their national law by March 2016.

 

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The most recent development regarding mortgage legislation in Spain is the approval by the Spanish government of Royal Decree-Law 1/2015 of February 27 on the “second chance” mechanism. The Royal Decree, although already in force, needs to be passed as law by Parliament, which is expected to take place through the emergency procedure in the next few days. During this process, amendments may be made to the current text. The main purpose of the Royal Decree is to regulate the “second chance” mechanism. This allows an individual who has been declared bankrupt to be discharged of outstanding obligations as long as he or she fulfills certain requirements: (i) the bankruptcy proceedings must have concluded, (ii) the debtor must have acted in good faith, the Royal Decree being restrictive as to when a debtor is considered to have acted in good faith, and (iii) the bankruptcy judge has to approve the terms of the discharge (and may revoke his or her approval under certain circumstances upon request of any creditor in the following five years). Discharge from mortgage obligations would only apply to the outstanding debts after the foreclosure, as long as such debts are considered ordinary or subordinate according to the Spanish Insolvency Law. Co-debtors and guarantors, if any, would remain liable.

Law 25/2015, of July 28, on the “second chance” mechanism, superseded Royal Decree Law 1/2015 and introduced certain changes to its content, including the introduction of a fee protection account for insolvency managers, limits on the remuneration of insolvency managers and the introduction of greater flexibility to a number of elements of the “second chance” mechanism.

Mutual Fund Regulation

Law 22/2014 of November 12, introduced a new legal regime for private investment entities in order to incorporate (i) Directive 2011/61/EU of the European Parliament and of the Council of June 8 on Alternative Investment Fund Managers, and (ii) Directive 2013/14/EU of the European Parliament and of the Council of May 21.

Spanish Corporate Enterprises Act

The consolidated text of the Corporate Enterprises Act adopted under Legislative Royal Decree 1/2010, of July 2, repealed the former Companies Act, adopted under Legislative Royal Decree 1564/1989, of December 22. This royal legislative decree has consolidated the legislation for joint stock companies (sociedades anónimas) and limited liability companies (sociedades de responsabilidad limitada) in a single text, bringing together the contents of the two aforementioned acts, as well as a part of the Securities Exchange Act.

Law 25/2011 of August 1, partially amended the Corporate Enterprises Act and incorporated Directive 2007/36/EC, of July 11, on the exercise of certain rights of shareholders in listed companies.

In addition, the Entrepreneur Act (Law 14/2013) and an amendment to the Insolvency Act (Legislative Royal Decree 11/2014) introduced some modifications on the Spanish Corporate Enterprises Act. Also, an amendment on corporate governance was introduced by Law 31/2014 of December 3. The main changes introduced by this law are related to the rights of shareholders (assistance, information and voting), the calling of a general shareholders’ meeting and the duties of the board of directors and the audit committee, appointments committee and remuneration committee.

Spanish Auditing Law

Law 12/2010, of June 30, amended Law 19/1988, of July 12, on Accounts Audit, Law 24/1988, of July 28, on Securities Exchanges and the consolidated text of the former Companies Act adopted by Legislative Royal Decree 1564/1989, of December 22 (currently, the Corporate Enterprises Act), for its adaptation to EU regulations. This law transposed Directive EU/2006/43 which regulates aspects, among others, related to: authorization and registry of auditors and auditing companies, confidentiality and professional secrecy which the auditors may observe, rules on independency and liability as well as certain rules on the composition and functions of the auditing committee. The Royal Decree 1/2011, of July 1, approved the consolidated text of the Accounts Audit Law 12/2010 and repealed Law 19/1988, of July 12. Law 12/2010 was subsequently amended by Law 22/2015, including, among other matters, with respect to the requirements applicable to audit firms.

 

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Law 11/2015 of June 18, on the recovery and resolution of credit institutions and investment firms

Law 11/2015 transposes a very important part of EU Law into Spanish law in respect of the recovery and resolution mechanisms for credit institutions and investment firms (the “institutions”). It further assumes many of the provisions of Law 9/2012 of November 14, 2012 on the restructuring and resolution of credit institutions, which it partially repeals.

The regime set in place constitutes a special and full administrative procedure that seeks to ensure maximum speed in the intervention of an institution so as to provide for the continuity of its core functions, while minimizing the impact of its non-viability on the economic system and on public resources.

Compared to Law 9/2012, Law 11/2015 regulates internal recapitalization as a resolution instrument conceived as a “bail-in” arrangement (the absorption of losses by the shareholders and by the creditors of an institution under resolution).

The internal recapitalization is a new resolution instrument, since the loss-absorption mechanism makes it extensive to all the institution’s creditors, and not only to the shareholders and the subordinated creditors as envisaged under Law 9/2012 of November 14, 2012.

In this respect, liabilities eligible for the bail-in are all the institution’s liabilities that are not expressly excluded or have not been excluded further to a decision by the FROB. These liabilities shall be susceptible to amortization or conversion into capital for the internal recapitalization of the institution concerned. Among the liabilities excluded are deposits guaranteed by the Deposit Guarantee Fund (up to €100,000) and liabilities incurred with employees, trade creditors and the tax or social security authorities.

Certain changes were made to the regime applicable in the event of the insolvency of an institution, in order to provide greater protection to the deposits of individuals and SMEs. In this respect, the following shall be considered as privileged credits: (i) deposits guaranteed by the Deposit Guarantee Fund (maximum of €100,000) and the rights to which they may have been subrogated should the guarantee have been made effective and (ii) the portion of the deposits of individuals and SMEs that exceeds the guaranteed level, and those deposits of those individuals and SMEs that would be guaranteed had they not been set up in branches located outside the EU.

For additional information on Law 11/2015, see “Item 3. Key Information—Risk Factors—Bail-in and write-down powers under the BRRD may adversely affect our business and the value of any securities we may issue”.

Royal Decree 1012/2015 of November 6, on development of Law on recovery and resolution of credit entities and investment firms and modification of Royal Decree on deposit guarantee funds of credit entities

Royal Decree 1012/2015 partially transposes the BRRD and develops Law 11/2015 (described above).

Royal Decree 1012/2015 includes a package of measures aimed at: (i) establishing the criteria for the application of the regulation for the resolution of credit entities, (ii) establishing the content of the recovery and resolution plans for credit entities, (iii) regulating the use of the resolution instruments set in Law 11/2015, and in particular, the actions to be carried out by the FROB, (iv) establishing the regime applicable to the FROB in connection with the managing of the funds addressed to finance the resolution procedures and to the contributions that credit entities must make to the National Resolution Fund and, (v) establishing the regime applicable to the resolution of cross border entities.

Law 5/2015 of April 27, on promoting corporate financing

Among other matters, Law 5/2015 establishes a number of changes to encourage bank financing to SMEs, sets out the new legal framework for financial credit entities and regulates crowd funding. Law 5/2015 has also introduced amendments on other matters, including securitizations and debt issuance. It consolidates into one piece of legislation what has, until now, been a dispersed legal framework on securitization.

 

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Law 5/2015 imposes an obligation on credit institutions to provide SMEs at least three months prior notice in the event the funding flow to an SME is to be cancelled or reduced by at least 35%. In so doing, the law aims to provide SMEs sufficient time to find new funding sources or to adjust the management of their own funds to avoid sudden liquidity deficiencies.

The main novelties of this new regime are the following: (i) private limited liability companies (sociedades limitadas or S.L.s) can issue and guarantee standard debt securities issuances capped at twice their own funds, (ii) the quantitative limit on debt issuances by non-listed public limited liability companies (sociedades anónimas or S.A.s) is removed. (iii) the management body of an issuer is authorized to approve standard debt securities issuances which do not yield part of the profits, unless stated otherwise in the issuer’s articles of association and (iv) it is clarified that it is unnecessary to appoint a commissioner and set up a syndicate of bondholders in debt issuances governed by foreign law and aimed at international markets.

U.S. Regulation

The legislative, regulatory and supervisory framework in the United States governing the financial services sector has undergone significant and rapid change since the financial crisis. Moreover, the intensity of supervisory and regulatory scrutiny has also increased. While most of the changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) that impact BBVA and its subsidiaries have been implemented or are expected to follow a known trajectory, new changes under the Trump administration, including their nature and impact, cannot yet be determined with any degree of certainty.

The Dodd-Frank Act addresses, among other issues, systemic risk oversight, bank capital standards, the resolution of failing systemically significant U.S. financial institutions, over-the-counter derivatives, restrictions on the ability of banking entities to engage in proprietary trading activities and invest in certain private equity funds, hedge funds and other covered funds (known as the “Volcker Rule”), consumer and investor protection, hedge fund registration, municipal advisor registration and regulation, securitization, investment advisor registration and regulation and the role of credit-rating agencies.

While U.S. regulators have implemented many provisions of the Dodd-Frank Act through detailed rulemaking, full implementation will require additional rulemaking and uncertainty remains about the final details, impact and timing of a number of rules.

Financial Regulatory Authorities

BBVA is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the “BHC Act”). As such, BBVA is subject to the regulation and supervision of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). BBVA’s direct and indirect activities and investments in the United States are limited to banking activities and certain non-banking activities that are “closely related to banking,” as determined by the Federal Reserve, and certain other activities permitted under the BHC Act. BBVA also is required to obtain the prior approval of the Federal Reserve before acquiring, directly or indirectly, the ownership or control of more than 5% of any class of voting securities of any U.S. bank or bank holding company.

A bank holding company is required to act as a source of financial strength for its U.S. bank subsidiaries. Among other things, this source of strength obligation may result in a requirement for BBVA, as controlling shareholder, to inject capital into its U.S. bank subsidiary.

BBVA’s U.S. bank subsidiary, Compass Bank (“Compass Bank”), and BBVA’s New York branch are subject to supervision and regulation by a variety of U.S. regulatory agencies. In addition to supervision by the Federal Reserve, BBVA’s New York branch is licensed and supervised by the New York State Department of Financial Services. Compass Bank is an Alabama state-chartered bank, is a member of the Federal Reserve System, and has branches in Alabama, Arizona, California, Colorado, Florida, New Mexico, and Texas. Compass Bank is supervised and examined by the Federal Reserve, the State of Alabama Banking Department and, with respect to consumer financial laws and regulations, the Consumer Financial Protection Bureau. In addition, certain aspects of Compass Bank’s branch operations in Arizona, California, Colorado, Florida, New Mexico, and Texas are subject to examination by the respective state banking regulators in such states. Compass Bank is also a depository institution insured by, and subject to the regulation of, the Federal Deposit Insurance Corporation (the “FDIC”).

 

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Compass Bank is a direct subsidiary of BBVA Compass Bancshares, Inc. (“Compass Bancshares”). Compass Bancshares is a bank holding company within the meaning of the BHC Act and is subject to supervision and regulation by the Federal Reserve.

BBVA Bancomer, S.A.’s agency office in Houston, Texas is a non-FDIC insured agency office of BBVA Bancomer, S.A., an indirect subsidiary of BBVA, which is licensed under the laws of the State of Texas and supervised by the Texas Department of Banking and the Federal Reserve.

Bancomer Transfer Services, Inc., a non-banking affiliate of BBVA and a direct subsidiary of BBVA Bancomer USA, Inc., is licensed as a money transmitter by the State of California Department of Financial Institutions, the Texas Department of Banking, and certain other state regulatory agencies. Bancomer Transfer Services, Inc. is also registered as a money services business with the Financial Crimes Enforcement Network of the U.S. Department of the Treasury.

BBVA’s indirect U.S. broker-dealer subsidiary, BBVA Securities Inc. (“BSI”), is subject to regulation and supervision by the SEC and the Financial Industry Regulatory Authority (“FINRA”) with respect to its securities activities, as well as various U.S. state regulatory authorities. Additionally, the securities underwriting and dealing activities of BSI are subject to regulation and supervision by the Federal Reserve. On December 19, 2016, BBVA and BSI entered into a consent order with the Federal Reserve under which they agreed to pay a $27 million civil money penalty for BSI engaging in activities contrary to its commitments under the authorizing order and BBVA directly engaging in impermissible underwriting and dealing activities.

The activities of BBVA’s U.S. investment adviser affiliates are regulated and supervised by the SEC. In addition, Compass Bank has registered with the SEC and the Municipal Securities Rulemaking Board as a municipal advisor pursuant to the Dodd-Frank Act’s municipal advisor registration requirements.

BBVA’s U.S. insurance agency affiliate is subject to regulation and supervision by various U.S. state insurance regulatory authorities.

BBVA is registered as a “swap dealer” (as defined in the Commodity Exchange Act and the regulations promulgated thereunder) under Title VII of the Dodd-Frank Act, which subjects BBVA to regulation and supervision by the U.S. Commodity Futures Trading Commission (the “CFTC”). BBVA’s world-wide swap activities are also subject to regulations adopted by the European Commission pursuant to the European Market Infrastructure Regulation (“EMIR”) and the EU’s Markets in Financial Instruments Directive (“MiFID”) and other European regulations and directives. The CFTC will deem BBVA to have complied with certain Dodd-Frank Act Title VII provisions for which, subject to certain conditions, the CFTC has found certain corresponding European provisions to be essentially identical or comparable, provided BBVA complies with such European provisions, as applicable. Compass Bank (and other entities of the BBVA Group) may register as a swap dealer if required by its swap activities or if it is determined to be beneficial to its business.

Currently, BBVA is not considering registration as a “security-based swap dealer” with the SEC.

Prudential Regulation

In the past few years, the Federal Reserve has imposed greater risk-based and leverage capital requirements, liquidity requirements, capital planning and stress testing requirements, risk management requirements and other enhanced prudential standards for bank holding companies with $50 billion or more in total consolidated assets, including Compass Bancshares. Under the enhanced prudential standard regulations applicable to foreign banking organizations with $50 billion or more in U.S. assets held outside of their U.S. branches and agencies, by July 1, 2016, BBVA designated Compass Bancshares as its separately capitalized top-tier U.S. intermediate holding company (“IHC”). Compass Bancshares holds all of BBVA’s U.S. bank and nonbank subsidiaries, including Compass Bank. As BBVA’s U.S. IHC, Compass Bancshares is subject to U.S. risk-based and leverage capital, liquidity, risk management, stress testing and other enhanced prudential standards on a consolidated basis. BBVA’s U.S. branches and agencies (and in certain cases, the entire U.S. operations of BBVA) are also subject to liquidity buffer and risk management requirements. In addition, BBVA is subject to requirements related to the adequacy and reporting of its home country capital and stress testing standards.

 

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Under Title I of the Dodd-Frank Act and implementing regulations issued by the Federal Reserve and the FDIC, BBVA must prepare and submit annually a plan for the orderly resolution of subsidiaries and operations in the event of future material financial distress or failure (the “Title I Resolution Plan”). For foreign-based companies subject to these resolution planning requirements, such as BBVA, the Title I Resolution Plan relates to subsidiaries, branches, agencies and businesses that are domiciled in, or whose activities are carried out in whole or in material part in, the United States. BBVA filed its last Title I Resolution Plan in December 2015 and was not required to file a plan in 2016. In addition, Compass Bank is subject to the FDIC rule requiring insured depository institutions with total assets of $50 billion or more to submit periodically to the FDIC a plan for resolution in the event of failure under the Federal Deposit Insurance Act.

As part of the implementation of enhanced prudential standards under the Dodd-Frank Act, in March 2016, the Federal Reserve reproposed a rule implementing single-counterparty credit limits for large U.S. bank holding companies and large FBOs with respect to their combined U.S. operations. The proposed rule would apply both to Compass Bancshares and to the combined U.S. operations of BBVA with different levels of stringency. Compass Bancshares’ credit exposure to any single counterparty would be limited to 25 percent of its capital stock and surplus. BBVA’s credit exposure with respect to only its combined U.S. operations would be limited to 15 percent of Tier 1 capital for counterparties that are G-SIBs and certain other large financial institutions and to 25 percent of Tier 1 capital for all other unaffiliated counterparties. The proposed rule would also require Compass Bancshares and BBVA to aggregate credit exposure across counterparties that are economically interdependent or that are connected by certain control relationships.

The Federal Reserve has proposed but not yet finalized an early remediation framework for large U.S. bank holding companies and large FBOs.

Capital and Liquidity

Compass Bancshares and Compass Bank are subject to the U.S. Basel III capital rules (“U.S. Basel III”), which are based on the Basel III regulatory capital standards established by the Basel Committee. Certain aspects of U.S. Basel III, such as the minimum capital ratios and the methodology for calculating risk-weighted assets, became effective on January 1, 2015 for Compass Bancshares and Compass Bank. Other aspects of the rules, such as the capital conservation buffer and certain deductions from and adjustments to regulatory capital, are being phased in over several years.

The minimum regulatory capital ratios under U.S. Basel III are the following: Common Equity Tier 1 risk-based capital ratio of 4.5%; Tier 1 risk-based capital ratio of 6.0%; Total risk-based capital ratio of 8.0%; and Tier 1 leverage ratio of 4.0%. The greater than 2.5% Common Equity Tier 1 capital conservation buffer will be fully phased in by 2019; the phase-in amount for 2017 is greater than 1.25%. Failure to maintain the capital conservation buffer will result in increasingly stringent restrictions on a banking organization’s ability to make dividend payments and other capital distributions and pay discretionary bonuses to executive officers.

U.S. Basel III also revised the capital thresholds for the prompt corrective action framework for insured depository institutions. To qualify as “well capitalized,” Compass Bank must maintain a Common Equity Tier 1 risk-based capital ratio of at least 6.5%, a Tier 1 risk-based capital ratio of at least 8.0%, a Total risk-based capital ratio of at least 10.0%, and a Tier 1 leverage ratio of at least 5.0%.

The federal banking regulators have issued liquidity coverage ratio (“LCR”) requirements, which are based on the Basel Committee’s LCR standard and are designed to ensure that covered banking organizations have sufficient high-quality liquid assets to cover expected net cash outflows over a 30-day liquidity stress period. As a U.S. bank holding company with total assets of $50 billion or more that is not an advanced approaches bank holding company, Compass Bancshares is subject to a modified version of the LCR. As of January 1, 2017, Compass Bancshares is required to maintain a minimum of 100% of the fully phased-in modified LCR. In addition, effective October 1, 2018, Compass Bancshares will be required to disclose certain quantitative and qualitative information related to its LCR calculation after each calendar quarter.

 

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On June 1, 2016, the Federal Reserve Board and other U.S. regulators proposed rules to implement net stable funding ratio (“NSFR”), which are based on additional quantitative liquidity standards developed by the Basel Committee and are designed to ensure that an institution maintains sufficiently stable amounts of longer-term funding over a one-year horizon. The proposal includes a modified, less stringent version of the NSFR that would apply to institutions with total assets of $50 billion or more that are not advanced approaches bank holding companies, such as Compass Bancshares.

Under the Federal Reserve’s capital plan and stress test rules, Compass Bancshares must submit an annual capital plan to the Federal Reserve for review, must conduct semi-annual stress tests and is subject to an annual supervisory stress test conducted by the Federal Reserve (“Dodd-Frank Act Stress Test”). The capital planning and stress test requirements are part of the Federal Reserve’s CCAR program, pursuant to which it reviews the qualitative and quantitative aspects of large U.S. bank holding companies’ internal capital planning process. Compass Bancshares’ annual capital plan must include an assessment of the expected uses and sources of capital over a forward-looking planning horizon of at least nine quarters, a detailed description of its process for assessing capital adequacy, its capital policy, and a discussion of any expected changes to its business plan that are likely to have a material impact on its capital adequacy or liquidity. The Federal Reserve may object, in whole or in part, to a capital plan or provide a notice of non-objection. If the Federal Reserve objects to a capital plan, the bank holding company may not make any capital distribution other than those with respect to which the Federal Reserve has indicated its non-objection. In January 2017, the Federal Reserve issued a final rule exempting large and noncomplex firms, including Compass Bancshares, from the qualitative component of CCAR. The Dodd-Frank Act and implementing rules issued by the Federal Reserve also impose stress test requirements on Compass Bank.

For the capital plan and stress test cycle beginning January 1, 2016, Compass Bancshares submitted its capital plan and company-run stress test results to the Federal Reserve by April 5, 2016. In June 2016, the Federal Reserve published summary results of the Dodd-Frank Act Stress Test, which showed that Compass Bancshares’ projected regulatory capital ratios exceeded the applicable regulatory minimums as defined by the Federal Reserve for all quarters included in the nine-quarter forecasting horizon under the hypothetical supervisory severely adverse scenario. In addition, the Federal Reserve did not object to the 2016 capital plan of Compass Bancshares. For the capital plan and stress test cycle beginning January 1, 2017, Compass Bancshares must submit its capital plan and company-run stress test results to the Federal Reserve by April 5, 2017, and the Federal Reserve is required to publish summary stress test results by June 30, 2017.

Volcker Rule

The Volcker Rule limits the ability of banking entities to sponsor or invest in certain hedge funds, private equity funds, and commodity pools (“covered funds”) and to engage as principal in certain types of proprietary trading unrelated to serving clients, subject to certain exclusions and exemptions. The Volcker Rule also limits the ability of banking entities and their affiliates to enter into certain transactions with covered funds with which they or their affiliates have certain relationships. The Volcker Rule regulations contain exemptions for market-making, hedging, underwriting, trading in U.S. government and agency obligations as well as certain foreign government obligations, and trading solely outside the United States, and also permit certain ownership interests in certain types of funds to be retained. The Federal Reserve has extended the Volcker Rule’s general conformance period for investments in and relationships with covered funds and certain foreign funds that were in place on or prior to December 31, 2013 until July 21, 2017. This extension of the conformance period does not apply to the Volcker Rule’s prohibitions on proprietary trading or to any investments in and relationships with covered funds made or entered into after December 31, 2013.

Derivatives

The Dodd-Frank Act established an extensive framework for the regulation of over-the-counter (“OTC”) derivatives by the CFTC and the SEC, including mandatory clearing, exchange trading and public and regulatory transaction reporting of certain OTC derivatives, as well as rules regarding the registration of swap dealers and major swap participants, and related capital, margin, business conduct, record keeping and other requirements applicable to such entities. While the CFTC has completed the majority of its regulations in this area, most of which are in effect, the SEC has not yet adopted a number of its swaps regulations. In December 2016, the CFTC reproposed regulations to impose position limits on certain physical commodities futures contracts and economically equivalent swaps, futures and options. In addition, the federal banking regulators and the CFTC adopted final rules establishing margin requirements for non-cleared swaps and security-based swaps. The final margin rules follow a

 

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phased implementation schedule, with certain initial margin and variation margin requirements in effect as of September 2016, additional variation margin requirements coming into effect in March 2017, and additional initial margin requirements phased in on an annual basis from September 2017 through September 2020, depending on the transactional volume of the parties and their affiliates.

Because BBVA is a non-U.S. swap dealer, the CFTC generally limits its direct regulation of BBVA with respect to swaps with U.S. persons and certain affiliates of U.S. persons. However, the CFTC will be applying certain transaction-level requirements when BBVA’s swap dealing activity involves the arrangement, negotiation, or execution by U.S. located personnel and is considering whether to apply regulatory transaction reporting to all swaps entered into by a non-U.S. swap dealer or instead rely on transaction reporting under comparable EU rules. In August 2016, the CFTC staff extended no-action relief for the applicability of most transaction-level requirements until at least September 30, 2017.

The so-called swaps “push-out” provision, Section 716 of the Dodd-Frank Act, prohibits U.S. federal assistance to be provided to any swaps entity, including any swap dealer, with respect to certain types of swaps, subject to certain exceptions. The swap activities of BBVA’s New York branch have always conformed to the requirements of Section 716. Should Compass Bank become a swap dealer, it will need to restrict its swap activities to conform to the “push-out” provision.

Other Regulations

The Dodd-Frank Act changed the FDIC deposit insurance assessment framework (the amounts paid by FDIC-insured institutions into the deposit insurance fund of the FDIC) to shift a greater portion of the aggregate assessments to large banks (such as Compass Bank). In March 2016, the FDIC finalized a rule imposing assessment surcharges on banks with $10 billion or more in total assets (such as Compass Bank) to increase the deposit insurance fund’s reserve ratio. These surcharges will cease on December 31, 2018.

The Dodd-Frank Act broadened the application of Sections 23A and 23B of Federal Reserve Act, although the Federal Reserve has not yet implemented such changes in Regulation W (“Reg W”). Reg W places various qualitative and quantitative restrictions on BBVA and its non-bank subsidiaries with regard to borrowing or otherwise obtaining credit from their U.S. banking affiliates or engaging in certain other transactions involving those subsidiaries. Such transactions must be on terms that would ordinarily be offered to unaffiliated entities, must be secured by designated amounts of specified collateral, are subject to quantitative limitations. Under the Dodd-Frank changes, credit exposure arising from derivative transactions, securities borrowing and lending transactions, and repurchase/reverse repurchase agreements are subject to the collateral and quantitative limitations. The Reg W restrictions also apply to certain transactions of BBVA’s New York Branch with certain of its affiliates.

The regulations that the CFPB may adopt could affect the nature of the consumer activities that Compass Bancshares, Compass Bank and BBVA’s New York branch may conduct, and may impose restrictions and limitations on the conduct of such activities. The CFPB has promulgated many mortgage-related rules since it was established under the Dodd-Frank Act, including rules related to the ability to repay and qualified mortgage standards, mortgage servicing standards, loan originator compensation standards, high-cost mortgage requirements, Home Mortgage Disclosure Act requirements and appraisal and escrow standards for higher-priced mortgages. These rules have created operational and strategic challenges for Compass Bancshares, as it is both a mortgage originator and a servicer.

Under the Durbin Amendment to the Dodd-Frank Act, the maximum permissible interchange fee that an issuer may receive for an electronic debit transaction is the sum of 21 cents per transaction, a 1 cent fraud prevention adjustment, and 5 basis points multiplied by the value of the transaction.

The Dodd-Frank Act requires the SEC to cause issuers with listed securities, which may include foreign private issuers such as BBVA, to establish a “claw back” policy to recoup previously awarded employee compensation in the event of an accounting restatement. The SEC proposed rules in 2015 to implement this provision. In addition, the Dodd-Frank Act requires U.S. regulatory agencies to prescribe regulations with respect to incentive-based compensation at financial institutions in order to prevent inappropriate behavior that could lead to a material financial loss. In 2016, federal regulators reproposed a rule that would require, among other things, the deferral of a percentage of certain incentive-based compensation for senior executives and certain other employees and, under certain circumstances, clawback of incentive-based compensation.

 

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The Dodd-Frank Act also grants the SEC discretionary rule-making authority to impose a new fiduciary standard on brokers, dealers and investment advisers, and expands the extraterritorial jurisdiction of U.S. courts over actions brought by the SEC or the United States with respect to violations of the antifraud provisions in the Securities Act, the Exchange Act and the Investment Advisers Act of 1940.

A major focus of U.S. governmental policy relating to financial institutions in recent years has been aimed at fighting money laundering and terrorist financing. Regulations applicable to BBVA and certain of its affiliates impose obligations to maintain appropriate policies, procedures, and controls to detect, prevent, and report money laundering. In particular, Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), as amended, requires financial institutions operating in the United States to (i) give special attention to correspondent and payable-through bank accounts, (ii) implement enhanced reporting due diligence, and “know your customer” standards for private banking and correspondent banking relationships, (iii) scrutinize the beneficial ownership and activity of certain non-U.S. and private banking customers (especially for so-called politically exposed persons), and (iv) develop new anti-money laundering programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement compliance programs under the Bank Secrecy Act and the sanctions programs administered by the Office of Foreign Assets Control. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing could have serious legal and reputational consequences for the institution.

Disclosure of Iranian Activities under Section 13(r) of the Exchange Act

The BBVA Group discloses the following information pursuant to Section 13(r) of the Exchange Act, which requires an issuer to disclose whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with natural persons or entities designated by the U.S. government under specified executive orders, including activities not prohibited by U.S. law and conducted outside the United States by non-U.S. affiliates in compliance with local law. In order to comply with this requirement, the Company has requested relevant information from its affiliates globally.

The BBVA Group has the following activities, transactions and dealings with Iran requiring disclosure.

Legacy contractual obligations related to counter indemnities. Before 2007, the BBVA Group issued certain counter indemnities to its non-Iranian customers in Europe for various business activities relating to Iran in support of guarantees provided by Bank Melli, two of which remained outstanding during the year ended December 31, 2016. For the year ended December 31, 2016, fees and/or commissions recorded in connection with these counter indemnities totaled $640.50. The BBVA Group does not allocate direct costs to fees and commissions and therefore has not disclosed a separate profit measure. In addition, the BBVA Group incurred on cancellation expenses related to one of these counter guarantees and enforcement and mail expenses related to the other counter guarantee which totaled $214,405.37 during this period. In accordance with Council Regulation (EU) Nr. 267/2012 of March 23, 2012, any payments of amounts due to Bank Melli under these counter indemnities were initially blocked and thereafter released upon authorization by the relevant Spanish authorities. The BBVA Group is committed to terminating these business relationships as soon as contractually possible and does not intend to enter into new business relationships involving Bank Melli.

Refund of funds from Bank Sepah. During the year ended December 31, 2016, Bank Sepah returned to the BBVA Group funds in the amount of $4,624.16 which had been originally transferred by the BBVA Group in March 2007 to an account at Bank Sepah in the name of BBVA’s representative office in Tehran, which no longer exists.

Letter of credit. During the year ended December 31, 2015, the BBVA Group had credit exposure to Bank Sepah arising from a letter of credit issued by Bank Sepah to a non-Iranian client of the BBVA Group in Europe. This letter of credit, which was granted before 2004, expired in October 2015. As a result, this letter of credit was no longer outstanding during the year ended December 31, 2016.

 

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Iranian embassy-related activity. The BBVA Group maintains bank accounts in Spain for two employees of the Iranian embassy in Spain. The two employees are Spanish citizens and one of them retired in 2015. Estimated gross revenues for the year ended December 31, 2016 from embassy-related activity, which include fees and/or commissions, did not exceed $2,490.10. The BBVA Group does not allocate direct costs to fees and commissions and therefore has not disclosed a separate profit measure. The BBVA Group is committed to terminating these business relationships as soon as legally possible.

C. Organizational Structure

As of December 31, 2016, the BBVA Group was composed of 370 consolidated entities and 89 entities accounted for using the equity method.

The companies are principally domiciled in the following countries: Argentina, Belgium, Bolivia, Brazil, Cayman Islands, Chile, Colombia, Ecuador, France, Germany, Ireland, Italy, Luxembourg, Mexico, Netherlands, Netherlands Antilles, Peru, Portugal, Spain, Switzerland, Turkey, United Kingdom, United States of America, Uruguay and Venezuela. In addition, BBVA has an active presence in Asia.

Below is a simplified organizational chart of BBVA’s most significant subsidiaries as of December 31, 2016.

 

Subsidiary

   Country of
Incorporation
   Activity    BBVA
Voting
Power
    BBVA
Ownership
     Total
Assets (1)
 
               (in Percentages)     

(In

Millions of
Euros)

 

BBVA BANCOMER, S.A. DE C.V.

   Mexico    Bank      100.00       100.00        86,242  

COMPASS BANK

   United States    Bank      100.00       100.00        86,188  

TURKIYE GARANTI BANKASI A.S

   Turkey    Bank      49.90 (2)      39.90        76,017  

BBVA CONTINENTAL, S.A.

   Peru    Bank      92.24 (3)      46.12        22,269  

BANCO BILBAO VIZCAYA ARGENTARIA CHILE, S.A.

   Chile    Bank      68.19       68.19        19,508  

BBVA SEGUROS, S.A. DE SEGUROS Y REASEGUROS

   Spain    Insurance      99.95       99.95        16,797  

BBVA COLOMBIA, S.A.

   Colombia    Bank      95.47       95.47        16,391  

BBVA BANCO FRANCES, S.A.

   Argentina    Bank      75.95       75.95        9,008  

PENSIONES BANCOMER, S.A. DE C.V.

   Mexico    Insurance      100.00       100.00        4,040  

BANCO BILBAO VIZCAYA ARGENTARIA (PORTUGAL), S.A.

   Portugal    Bank      100.00       100.00        4,028  

SEGUROS BANCOMER, S.A. DE C.V.

   Mexico    Insurance      100.00       100.00        3,347  

BANCO BILBAO VIZCAYA ARGENTARIA URUGUAY, S.A.

   Uruguay    Bank      100.00       100.00        3,051  

 

(1) Information for non-EU subsidiaries has been calculated using the prevailing exchange rates on December 31, 2016.
(2) Calculated by adding BBVA’s and the Dogus group’s stakes in Garanti as of December 31, 2016 (39.90% and 10.0002%, respectively). As a result of the shareholders’ agreement between BBVA and Dogus then in effect, Garanti was consolidated within the BBVA Group. See “—Material Contracts—Shareholders’ Agreement in Connection with Garanti.”
(3) This figure represents the interest of Holding Continental S.A., which owns 92.24% of the capital stock of BBVA Continental. Each of BBVA and Inversiones Breca S.A. owns 50.00% of the capital stock of Holding Continental S.A. As a result of the shareholders’ agreement entered into between BBVA and Inversiones Breca S.A., BBVA Continental is consolidated within the BBVA Group.

D. Property, Plants and Equipment

We own and rent a substantial network of properties in Spain and abroad, including 3,303 branch offices in Spain and, principally through our various subsidiaries, 5,357 branch offices abroad as of December 31, 2016. As of December 31, 2016, approximately 67% of our branches in Spain and 65% of our branches abroad (excluding those branches relating to the Garanti group) were rented from third parties pursuant to short-term leases that may be renewed by mutual agreement.

 

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BBVA, through a real estate company of the Group, is constructing its new corporate headquarters at a development area in the north of Madrid (Spain). As of December 31, 2016, the accumulated investment for this project amounted to €958 million.

In addition, BBVA Bancomer is building its new corporate headquarters in Mexico D.F. As of December 31, 2016, the accumulated investment for this project amounted to €889 million.

E. Selected Statistical Information

The following is a presentation of selected statistical information for the periods indicated. Where required under Industry Guide 3, we have provided such selected statistical information separately for our domestic and foreign activities, pursuant to our calculation that our foreign operations are significant according to Rule 9-05 of Regulation S-X.

Average Balances and Rates

The tables below set forth selected statistical information on our average balance sheets, which are based on the beginning and month-end balances in each year. We do not believe that monthly averages present trends materially different from those that would be presented by daily averages. Interest income figures, when used, include interest income on non-accruing loans to the extent that cash payments have been received. Loan fees are included in the computation of interest revenue.

 

     Average Balance Sheet - Assets and Interest from Earning Assets  
     Year Ended December 31,
2016
    Year Ended December 31,
2015
    Year Ended December 31,
2014
 
     Average
Balance
     Interest      Average
Yield (1)
    Average
Balance
     Interest      Average
Yield (1)
    Average
Balance
     Interest     Average
Yield (1)
 
     (In Millions of Euros, Except Percentages)  

Assets

                       

Cash and balances with central banks and other demand deposits

     26,209        10        0.05     23,542        2        0.02     15,219        4       0.04

Debt securities, equity instruments and derivatives

     202,388        5,072        2.51     211,589        4,673        2.21     181,762        4,505       2.48

Domestic

     133,009        1,772        1.33     143,760        1,947        1.35     128,539        2,182       1.70

Foreign

     69,379        3,300        4.76     67,829        2,726        4.02     53,223        2,323       4.37

Loans and receivables

     454,299        22,301        4.91     421,300        19,881        4.72     362,740        18,169       5.01

Loans and advances to central banks

     15,326        229        1.50     12,004        140        1.17     11,745        132       1.12

Loans and advances to credit institutions

     28,078        218        0.78     27,171        270        0.99     22,811        234       1.03

Loans and advances to customers

     410,895        21,853        5.32     382,125        19,471        5.10     328,183        17,803       5.42

In euros

     201,967        3,750        1.86     196,987        4,301        2.18     186,965        4,843       2.59

Domestic

     192,186        3,685        1.92     192,508        4,285        2.23     186,271        4,844       2.60

Foreign

     9,781        65        0.66     4,479        16        0.37     695        (1     (0.08 )% 

In other currency

     208,928        18,104        8.67     185,139        15,170        8.19     141,218        12,960       9.18

Domestic

     15,355        348        2.27     14,923        284        1.91     12,112        263       2.17

Foreign

     193,573        17,756        9.17     170,216        14,886        8.75     129,106        12,697       9.83

Non-earning assets

     52,748        325        0.62     49,128        226        0.46     40,686        159       0.39
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total average assets (2)

     735,645        27,708        3.77     705,559        24,783        3.51     600,407        22,838       3.80
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Rates have been presented on a non-taxable equivalent basis.
(2) Foreign activity represented 49.84% of the total average assets for the year ended December 31, 2016 and 41.86% for the year ended December 31, 2015.

 

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     Average Balance Sheet - Liabilities and Interest Paid on Interest Bearing Liabilities  
     Year Ended December 31,
2016
    Year Ended December 31,
2015
    Year Ended December 31,
2014
 
     Average
Balance
     Interest      Average
Yield (1)
    Average
Balance
     Interest     Average
Yield (1)
    Average
Balance
     Interest     Average
Yield (1)
 
     (In Millions of Euros, Except Percentages)  

Liabilities

                      

Deposits from central banks and credit institutions

     101,975        1,866        1.83     99,289        1,559       1.57     81,860        1,292       1.58

Customer deposits

     398,851        5,944        1.49     366,249        4,390       1.20     307,705        4,335       1.41

In euros

     195,310        766        0.39     187,721        1,024       0.55     160,946        1,725       1.07

Domestic

     185,046        739        0.40     182,351        1,015       0.56     159,980        1,725       1.08

Foreign

     10,264        26        0.26     5,370        9       0.17     965        —         —    

In other currency

     203,541        5,178        2.54     178,528        3,366       1.89     146,759        2,610       1.78

Domestic

     11,543        39        0.34     9,529        (53     (0.55 )%      6,973        (41     (0.59 )% 

Foreign

     191,998        5,139        2.68     168,999        3,419       2.02     139,786        2,651       1.90

Debt certificates and subordinated liabilities

     89,876        1,738        1.93     89,672        1,875       2.09     80,132        1,831       2.29

Non-interest-bearing liabilities

     89,328        1,101        1.23     96,049        936       0.97     83,620        998       1.19

Stockholders’ equity

     55,616        —          —         54,300        —         —         47,091        —         —    
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total average liabilities (2)

     735,645        10,648        1.45     705,559        8,761       1.24     600,407        8,456       1.41
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Rates have been presented on a non-taxable equivalent basis.
(2) Foreign activity represented 45.62% of the total average liabilities for the year ended December 31, 2016 and 41.86% for the year ended December 31, 2015.

Changes in Net Interest Income-Volume and Rate Analysis

The following tables allocate changes in our net interest income between changes in volume and changes in rate for 2016 compared with 2015, and 2015 compared with 2014. Volume and rate variance have been calculated based on movements in average balances over the period and changes in interest rates on average interest-earning assets and average interest-bearing liabilities. The only out-of-period items and adjustments excluded from the following table are interest payments on loans which are made in a period other than the period in which they are due. Loan fees were included in the computation of interest income.

 

     2016/2015  
     Increase (Decrease) Due to Changes in  
     Volume (1)      Rate (2)      Net Change  
     (In Millions of Euros)  

Interest income

        

Cash and balances with central banks

     —          7        8  

Securities portfolio and derivatives

     (83      482        399  

Loans and advances to central banks

     45        44        89  

Loans and advances to credit institutions

     65        (117      (52

Loans and advances to customers

     2,063        319        2,382  

In euros

     12        (564      (552

Domestic

     (7      (593      (600

Foreign

     20        29        48  

In other currencies

     2,051        883        2,934  

Domestic

     8        56        64  

Foreign

     2,043        827        2,870  

Other assets

     22        77        99  
        

 

 

 

Total income

     2,112        813        2,925  
        

 

 

 

Interest expense

        

Deposits from central banks and credit institutions

     82        225        307  

Customer deposits

     477        1,076        1,553  

In euros

     23        (282 )       (258 ) 

Domestic

     15        (290 )       (275 ) 

Foreign

     8        9        17  

In other currencies

     454        1,357        1,812  

Domestic

     (11 )       103        92  

Foreign

     465        1,255        1,720  

Debt certificates and subordinated liabilities

     64        (201      (137

Other liabilities

     (24      188        165  
        

 

 

 

Total expense

     600        1,288        1,888  
        

 

 

 

Net interest income

           1,037  
        

 

 

 

 

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(1)  The volume effect is calculated as the result of the average interest rate of the earlier period multiplied by the difference between the average balances of both periods.
(2)  The rate effect is calculated as the result of the average balance of the earlier period multiplied by the difference between the average interest rates of both periods.

 

     2015/2014  
     Increase (Decrease) Due to Changes in  
     Volume (1)      Rate (2)      Net Change  
     (In Millions of Euros)  

Interest income

        

Cash and balances with central banks

     2        (4      (1

Securities portfolio and derivatives

     896        (728      168  

Loans and advances to central banks

     3        5        8  

Loans and advances to credit institutions

     84        (48      36  

Loans and advances to customers

     4,263        (2,595      1,668  

In euros

     159        (701      (542

Domestic

     162        (721      (559

Foreign

     (3      20        17  

In other currencies

     4,104        (1,894      2,210  

Domestic

     61        (40      21  

Foreign

     4,043        (1,854      2,189  

Other assets

     36        31        67  
        

 

 

 

Total income

           1,945  
        

 

 

 

Interest expense

        

Deposits from central banks and credit institutions

     411        (144      267  

Customer deposits

     780        (725      56  

In euros

     241        (943      (701

Domestic

     241        (952      (710

Foreign

     0        9        9  

In other currencies

     539        218        757  

Domestic

     (15      3        (12

Foreign

     554        215        769  

Debt certificates and subordinated liabilities

     274        (231      44  

Other liabilities

     191        (252      (62
        

 

 

 

Total expense

           305  
        

 

 

 

Net interest income

           1,641  
        

 

 

 

 

(1)  The volume effect is calculated as the result of the average interest rate of the earlier period multiplied by the difference between the average balances of both periods.
(2)  The rate effect is calculated as the result of the average balance of the earlier period multiplied by the difference between the average interest rates of both periods.

 

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Interest Earning Assets—Margin and Spread

The following table analyzes the levels of our average earning assets and illustrates the comparative gross and net yields and spread obtained for each of the years indicated.

 

     December 31,  
     2016     2015     2014  
     (In Millions of Euro, except Percentages)  

Average interest earning assets

     682,897       647,177       554,457  

Gross yield(1)

     4.1     3.8     4.1

Net yield(2)

     3.8     3.5     3.8

Net interest margin (3)

     2.5     2.5     2.6

Average effective rate paid on all interest-bearing liabilities

     1.8     1.6     1.8

Spread(4)

     2.3     2.3     2.3

 

(1)  Gross yield represents total interest income divided by average interest earning assets.
(2)  Net yield represents total interest income divided by total average assets.
(3)  Net interest margin represents net interest income as percentage of average interest earning assets.
(4)  Spread is the difference between gross yield and the average cost of interest-bearing liabilities.

ASSETS

Interest-Bearing Deposits in Other Banks

As of December 31, 2016, interbank deposits (excluding deposits with central banks) represented 4.3% of our total assets. Of such interbank deposits, 21.8% were held outside of Spain and 78.2% in Spain. We believe that our deposits are generally placed with highly rated banks and have a lower risk than many loans we could make in Spain. However, such deposits are subject to the risk that the deposit banks may fail or the banking system of certain of the countries in which a portion of our deposits are made may face liquidity or other problems.

Securities Portfolio

As of December 31, 2016, our total securities portfolio (consisting of investment securities and loans and receivables) was carried on our consolidated balance sheet at a carrying amount (equivalent to its market or appraised value as of such date) of €128,912 million, representing 17.6% of our total assets. €36,022 million, or 27.9%, of our securities portfolio consisted of Spanish Treasury bonds and Treasury bills. The average yield during 2016 on the investment securities that BBVA held was 3.3%, compared with an average yield of approximately 4.9% earned on loans and advances during 2016. See Notes 10 and 12 to the Consolidated Financial Statements. For a discussion of our investments in affiliates, see Note 16 to the Consolidated Financial Statements. For a discussion of the manner in which we value our securities, see Notes 2.2.1 and 8 to the Consolidated Financial Statements.

The following tables analyze the carrying amount and fair value of debt securities as of December 31, 2016, December 31, 2015 and December 31, 2014, respectively. The trading portfolio is not included in the tables below because the amortized costs and fair values of these items are the same. See Note 10 to the Consolidated Financial Statements.

 

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     As of December 31, 2016  
     Amortized cost      Fair Value (1)      Unrealized Gains      Unrealized Losses  
     (In Millions of Euros)  

DEBT SECURITIES -

           

AVAILABLE FOR SALE PORTFOLIO

           
  

 

 

    

 

 

    

 

 

    

 

 

 

Domestic-

     24,731        25,540        828        (19
  

 

 

    

 

 

    

 

 

    

 

 

 

Spanish Government and other government agencies debt securities

     22,427        23,119        711        (18

Other debt securities

     2,305        2,421        117        (1

Issued by Central Banks

     —          —          —          —    

Issued by credit institutions

     986        1,067        82        —    

Issued by other institutions

     1,319        1,354        36        (1
  

 

 

    

 

 

    

 

 

    

 

 

 

Foreign-

     49,253        49,040        773        (987
  

 

 

    

 

 

    

 

 

    

 

 

 

Mexico

     11,525        11,200        19        (343

Mexican Government and other government agencies debt securities

     9,728        9,438        11        (301

Other debt securities

     1,797        1,763        8        (42

Issued by Central Banks

     —          —          —          —    

Issued by credit institutions

     86        87        2        (1

Issued by other institutions

     1,710        1,675        6        (41

The United States

     14,256        14,043        48        (261

U.S. Treasury and other U.S. Government agencies debt securities

     1,702        1,683        1        (19

States and political subdivisions debt securities

     6,758        6,654        8        (112

Other debt securities

     5,797        5,706        39        (130

Issued by Central Banks

     —          —          —          —    

Issued by credit institutions

     95        97        2        —    

Issued by other institutions

     5,702        5,609        37        (130

Turkey

     5,550        5,443        73        (180

Turkey Government and other government agencies debt securities

     5,055        4,961        70        (164

Other debt securities

     495        482        2        (16

Issued by Central Banks

     —          —          —          —    

Issued by credit institutions

     448        436        2        (15

Issued by other institutions

     47        46        —          (1

Other countries

     17,923        18,354        634        (203

Other foreign governments and other government agencies debt securities

     7,882        8,156        373        (98

Other debt securities

     10,041        10,197        261        (105

Issued by Central Banks

     1,657        1,659        4        (2

Issued by credit institutions

     3,269        3,311        96        (54

Issued by other institutions

     5,115        5,227        161        (49
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL AVAILABLE FOR SALE PORTFOLIO

     73,985        74,580        1,601        (1,006
  

 

 

    

 

 

    

 

 

    

 

 

 

HELD TO MATURITY PORTFOLIO

           
  

 

 

    

 

 

    

 

 

    

 

 

 

Domestic-

     8,625        8,717        92        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Spanish Government and other government agency debt securities

     8,063        8,153        90        —    

Other domestic debt securities

     562        564        2        —    

Issued by Central Banks

     —          —          —          —    

Issued by credit institutions

     494        496        2        —    

Issued by other institutions

     68        68        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Foreign-

     9,071        8,902        16        (185
  

 

 

    

 

 

    

 

 

    

 

 

 

Government and other government agency debt securities

     7,982        7,830        13        (165

Other debt securities

     1,089        1,072        4        (21
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL HELD TO MATURITY PORTFOLIO

     17,696        17,619        108        (185
  

 

 

    

 

 

    

 

 

    

 

 

 
        —          

TOTAL DEBT SECURITIES

     91,681        92,199        1,709        (1,192
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Fair values for listed securities are determined on the basis of their quoted prices at the end of the period. Fair values are used for unlisted securities based on our estimates and valuation techniques. See Note 8 to the Consolidated Financial Statements.

 

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     As of December 31, 2015  
     Amortized cost      Fair Value (1)      Unrealized Gains      Unrealized Losses  
     (In Millions of Euros)  

DEBT SECURITIES -

           

AVAILABLE FOR SALE PORTFOLIO

           
  

 

 

    

 

 

    

 

 

    

 

 

 

Domestic-

     43,500        45,668        2,221        (53
  

 

 

    

 

 

    

 

 

    

 

 

 

Spanish Government and other government agencies debt securities

     38,763        40,799        2,078        (41

Other debt securities

     4,737        4,869        144        (11

Issued by Central Banks

     —          —          —          —    

Issued by credit institutions

     2,702        2,795        94        —    

Issued by other institutions

     2,035        2,074        50        (11
  

 

 

    

 

 

    

 

 

    

 

 

 

Foreign-

     62,734        62,641        1,132        (1,226
  

 

 

    

 

 

    

 

 

    

 

 

 

Mexico

     12,627        12,465        73        (235

Mexican Government and other government agencies debt securities

     10,284        10,193        70        (160

Other debt securities

     2,343        2,272        4        (75

Issued by Central Banks

     —          —          —          —    

Issued by credit institutions

     260        254        1        (7

Issued by other institutions

     2,084        2,019        3        (68

The United States

     13,890        13,717        63        (236

U.S. Treasury and other U.S. government agencies debt securities

     2,188        2,177        4        (15

States and political subdivisions debt securities

     4,629        4,612        9        (26

Other debt securities

     7,073        6,927        50        (195

Issued by Central Banks

     —          —          —          —    

Issued by credit institutions

     71        75        5        (1

Issued by other institutions

     7,002        6,852        45        (194

Turkey

     13,414        13,265        116        (265

Turkey Government and other government agencies debt securities

     11,801        11,682        111        (231

Other debt securities

     1,613        1,584        4        (34

Issued by Central Banks

     —          —          —          —    

Issued by credit institutions

     1,452        1,425        3        (30

Issued by other institutions

     162        159        1        (4

Other countries

     22,803        23,194        881        (490

Other foreign governments and other government agencies debt securities

     9,778        10,356        653        (76

Other debt securities

     13,025        12,838        227        (414

Issued by Central Banks

     2,277        2,273        —          (4

Issued by credit institutions

     3,468        3,488        108        (88

Issued by other institutions

     7,280        7,077        119        (322
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL AVAILABLE FOR SALE PORTFOLIO

     106,234        108,310        3,354        (1,278
  

 

 

    

 

 

    

 

 

    

 

 

 

HELD TO MATURITY PORTFOLIO

           
  

 

 

    

 

 

    

 

 

    

 

 

 

Domestic-

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Foreign-

     —          —          —          —